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ACRA assigns BBB+ to JSC «MO «Kazakhstan Mortgage Company», outlook Negative, under the international scale and AA(RU), outlook Negative, under the national scale for the Russian Federation

The credit rating assigned to JSC «MO «Kazakhstan Mortgage Company» (hereinafter, JSC «MC «KMC», or the Company) under the international scale is based on its high importance for the economy of the Republic of Kazakhstan (ACRA rating under the international scale — BBB+, outlook Negative; hereinafter, the Republic, or Kazakhstan), and therefore ACRA’s opinion about a very high likelihood of extraordinary government support to the Company in case of urgency. The Agency notes that JSC «MC «KMC» performs an important social role aimed at improving housing affordability in Kazakhstan. In the next few years, a single housing operator will be established in the Republic on the Company’s basis through a merger with other development institutions that fulfil broadly similar functions. The Negative outlook reflects Kazakhstan’s credit rating outlook.

The credit rating assigned to the Company under the national scale for the Russian Federation is AA(RU), outlook Negative, as per the Methodology for Mapping Credit Ratings Assigned on ACRA’s International Scale to Credit Ratings Assigned on ACRA’s National Scale for the Russian Federation.

JSC «MC «KMC» is a wholly owned subsidiary of “Baiterek” National Managing Holding JSC (hereinafter, “Baiterek” Holding, or the Holding), the sole shareholder of which is the government of Kazakhstan. The key objectives of the Holding are to contribute to the sustainable development of the economy of Kazakhstan by supporting its key segments and strategically important enterprises, as well as small and medium-sized businesses, improving housing affordability for individuals, developing innovations and exports. Apart from JSC «MC «KMC», the Holding controls another ten subsidiaries; each of them implements a specific mandate.

Key rating assessment factors

ACRA assesses the likelihood of state support as very high. JSC «MC «KMC» performs an important social function by facilitating the implementation of state initiatives when it comes to housing provision in Kazakhstan. The state, represented by the Holding, exercises operational control over JSC «MC «KMC». Furthermore, the Company’s active operations are almost entirely state-funded. According to ACRA, the termination or disruption of the Company’ activities may entail negative economic and social consequences for the economy of Kazakhstan, and cause significant damage to the government’s reputation.

The main tools used by the Company to implement its functions are the provision of rental housing with the right for a subsequent purchase, and mortgage loans. These loans are issued by the Company, or can be acquired from commercial banks. The target audience for the rental housing segment (exceeds the mortgage portfolio by nearly 2.3 times) are those employed primarily in the education and health sectors, as well as civil servants and military personnel.

In order to optimize the Holding’s structure and avoid duplication of functions, it was decided to merge the Company with related “Baiterek development” JSC (surpasses JSC «MC «KMC» by nearly one and a half times in terms of assets), which key objective is to increase the availability of financial resources for the construction industry of Kazakhstan. Considering possible technical difficulties because of the coronavirus outbreak, ACRA expects the merger to be completed by the end of 2020. In the longer term, it is also planned to merge the Company with JSC “Housing Construction Guarantee Fund”, which is responsible for the development of shared-equity housing construction in Kazakhstan.

ACRA believes that the planned consolidation of functions of various housing and construction operators in Kazakhstan on the basis of JSC «MC «KMC» will strengthen the Company’s position, which in turn supports the Agency’s opinion regarding the rated entity being an integral part of the national economy.

Taking into account the Company’s high importance for Kazakhstan and the involvement of the state in its operating activities, the Company’s standalone creditworthiness is not a critical factor affecting its credit ratings. However, ACRA notes a relatively good credit quality of the Company’s rental and mortgage portfolios. According to ACRA estimates, the share of potentially problem borrowers and tenants is within 5% of the total portfolio (nearly 12% of capital). ACRA does not expect this ratio to change significantly after the merger with “Baiterek development” JSC. Overall, most of the latter company’s assets are represented by investments in securities, 70% of which are bonds of regions (these funds are used by the regions to finance housing and infrastructure construction).

Since JSC «MC «KMC» is a regulated organization, which should comply with prudential requirements for mortgage organizations (all requirements are now fulfilled with a good margin), ACRA considers it important to note that the maximum level of risk per borrower may be violated after the merger with “Baiterek development” JSC. “Baiterek development” JSC is the holder of bonds issued by “Fincraft Group” LLP (previously known as Novacom Corporation), which, according to ACRA estimates, will amount to around 40% of the joint entity’s equity. ACRA notes that the purchase of securities was made from the balance sheet of non-regulated “Baiterek development” JSC and before the planned merger, and will be monitoring the developments. Apart from regulatory issues, according to the Agency, such kind of concentration in assets of the joint company will also be a risk factor in the current difficult economic situation caused by low oil prices and the coronavirus outbreak. The bonds of “Fincraft Group” LLP are collateralized mainly by the shares of JSC BTA Bank, which is characterized by low, in ACRA’s view, information transparency and is primarily engaged in asset restructuring, asset recovery, court and pretrial settlements, as well as sales of foreclosed property.

The Company’s financial results are relatively stable and predictable. Hence, its return on equity (ROE) averaged 8% over the last five years. The Agency does not expect a significant change in the Company’s profitability metrics within the next 18 months.

Key assumptions

  • Maintained state shareholder and operational control;
  • Maintenance of an important social function for the Kazakh economy;
  • Planned merger with “Baiterek development” JSC within the next 12 months.

Potential outlook or rating change factors under the international scale

The Negative outlook assumes the possibility of a negative rating action within the 12 to 18–month horizon.

A positive rating action may be prompted by:

  • Higher creditworthiness of the Republic of Kazakhstan.

A negative rating action may be prompted by:

  • Deterioration in creditworthiness of the Republic of Kazakhstan;
  • Signs of decreased systemic importance of the Company for Kazakhstan’s economy.

Potential outlook or rating change factors under the national scale for the Russian Federation

The Negative outlook assumes the possibility of a negative rating action within the 12 to 18–month horizon.

A positive rating action may be prompted by:

  • Higher creditworthiness of the Republic of Kazakhstan.

A negative rating action may be prompted by:

  • Deterioration in creditworthiness of the Republic of Kazakhstan;
  • Signs of decreased systemic importance of the Company for Kazakhstan’s economy.

Rating components under the international scale

SCA: none.

Adjustments: none.

Support: on par with the Republic of Kazakhstan.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating was assigned to JSC «MO «Kazakhstan Mortgage Company» under the international scale based on the Methodology for Analyzing Relationships Between Rated Entities and the State under the International Scale, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities. The credit rating was assigned to JSC «MO «Kazakhstan Mortgage Company» under the national scale for the Russian Federation based on the Methodology for Mapping Credit Ratings Assigned on ACRA’s International Scale to Credit Ratings Assigned on ACRA’s National Scale for the Russian Federation, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.

Credit ratings under the international scale and the national scale for the Russian Federation have been assigned to JSC «MO «Kazakhstan Mortgage Company» for the first time. The credit ratings and credit rating outlooks for JSC «MO «Kazakhstan Mortgage Company» are expected to be revised within one year following the publication date of this press release.

The credit ratings are based on the data provided by JSC «MO «Kazakhstan Mortgage Company», information from publicly available sources, and ACRA’s own databases. The rating analysis was conducted using IFRS reporting of JSC «MO «Kazakhstan Mortgage Company». The credit ratings are solicited, and JSC «MO «Kazakhstan Mortgage Company» participated in their assignment.

No material discrepancies between the provided information and the data officially disclosed by JSC «MO «Kazakhstan Mortgage Company» in its financial statements have been discovered.

ACRA provided no additional services to JSC «MO «Kazakhstan Mortgage Company». No conflicts of interest were discovered in the course of the credit rating assignment.

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