Overview
- In our view, materially higher macroeconomic and operating risks in Russia have weakened the creditworthiness of the IDF Eurasia Group, which extracts about 70% of its revenue from Russia, but also operates in Kazakhstan through rated OnlineKazFinance Microfinance Organization LLP (OKF).
- We think that IDF Eurasia's weaker group credit profile may constrain OKF's creditworthiness through deteriorating counterparty confidence that leads to funding constraints, or the risk of negative group intervention.
- At the same time, the planned demerger of Kazakhstan-based assets into a newly incorporated group, legally and operationally separated from the Russian assets, may reduce risks for OKF's creditworthiness.
- Therefore, we lowered our long- and short-term ratings on OKF to 'CCC+/C' from 'B/B', as well as our Kazakhstan national scale rating to 'kzB+' from 'kzBB+', and placed them on CreditWatch with developing implications.
- The CreditWatch developing reflects the uncertainty of OKF's future rating trajectory over the next 90 days, with a higher rating partly contingent on the speed and outcome of the group's legal entity restructuring, balanced against risks associated with its current structure as part of IDF Eurasia.
Rating Action
On April 14, 2022, S&P Global Ratings lowered its long- and short-term issuer credit ratings on Kazakhstan-based OnlineKazFinance Microfinance Organization LLP (OKF) to 'CCC+/C' from 'B/B' and placed them on CreditWatch with developing implications. We also revised down our Kazakhstan national scale rating to 'kzB+' from 'kzBB+'.
Rationale
The downgrade reflects our view that OKF's credit risks have significantly increased, primarily due to our weaker group credit profile (GCP) assessment for parent IDF Eurasia. We note that the group extracts almost 70% of its revenue from Russia, which is currently facing extremely challenging economic, financing, and operating conditions. We understand that the group's key operating companies in Russia, Money Man and ID Collect, currently have adequate liquidity buffers and very comfortable debt maturity profiles for 2022. Positively, both Russian subsidiaries do not have foreign-currency-denominated debt. At the same time, the weaker macroeconomic environment in Russia may lead to higher credit losses and pressure profitability in the coming quarters, while tough monetary conditions may constrain Russia-based companies from attracting new funding and supporting business growth.
Kazakhstan's economy has been somewhat sheltered from regional turbulence so far, but tighter financing conditions and high tenge volatility may weaken OKF's financial performance and make strategy execution difficult. As of March 1, 2022, funding denominated in foreign currency represented about 48% of its liabilities with an unhedged position of about 6.8%. In or view, OKF is currently exposed to high counterparty risk by hedging its currency risk mainly with a low-rated broker. Although the broker has been fulfilling its obligations so far, we see a high risk that OKF might face significant losses due to the realization of counterparty credit risk and high currency volatility. Like the Russia-based entities, we recognize OKF's comfortable funding maturity profile versus its assets, relatively large portion of undrawn credit lines, and adequate liquidity. The company is also working to diversify its hedging capabilities with brokers that have higher creditworthiness. In our view, this might cushion OKF from default if the regional operating environment continues to deteriorate.
The potential group restructuring and demerger of Kazakhstani companies may shield OKF's creditworthiness from the direct implications of Russia-related contagion. The planned restructuring, with the establishment of a new company in the United Arab Emirates holding Kazakhstan-based assets, including OKF, will likely lead to full organizational and financial separation from the Russian part of the business. If successful, we will likely no longer link our OKF rating to IDF Eurasia's consolidated group creditworthiness, which we currently assess at 'ccc+'. Our long-term rating on OKF after the restructuring is completed will likely be based on the creditworthiness of the new group housing IDF Eurasia's Kazakhstan assets. Although, management plans to finalize the restructuring over the next two-to-three months, we think that uncertainty regarding the timing remains.
CreditWatch
The CreditWatch developing reflects the uncertainty of the future trajectory and the potential to raise, lower, or affirm the ratings over the next 90 days.
We could raise the rating on OKF on completion of the legal entity restructuring if it is fully ring-fenced from IDF Eurasia's Russian assets organizationally, operationally, and financially as a result of the group's planned restructuring. An upgrade would be contingent on OKF maintaining adequate liquidity and a stable funding profile. We would expect no major losses from its foreign-exchange mismatches or lending business, and a reduction in its foreign currency risks by relying more on local currency funding.
We could affirm the rating on OKF in the next 90 days if the planned restructuring is materially delayed or indefinitely postponed, but IDF Eurasia's consolidated group creditworthiness does not further weaken. Maintaining adequate liquidity and a stable funding profile at the Russian and Kazakhstani companies would remain a prerequisite of the affirmation.
We could lower the rating on OKF if we see a material credit weakening at its sister companies in Russia, with limited progress or significant delays to the legal entity restructuring. A significant increase in credit losses and material constraints to attracting new funding, together with deteriorating liquidity, might also lead us to take a negative rating action.
Ratings Score Snapshot
| To | From | |
|---|---|---|
| Issuer credit rating: | CCC+/Watch Dev/C | B/Stable/B |
| Entity status within group: | Core (no impact) | Core (no impact) |
| Sovereign rating: | BBB- (no impact) | BBB- (no impact) |
| Likelihood of government support: | Low (no impact) | Low (no impact) |
| Kazakhstan national scale | kzB+/Watch Dev | kzBB+ |
Related Criteria
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- General Criteria: Group Rating Methodology, July 1, 2019
- Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
- General Criteria: Methodology For National And Regional Scale Credit Ratings, June 25, 2018
- General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
- Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
- Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
- General Criteria: Ratings Above The Sovereign--Corporate And Government Ratings: Methodology And Assumptions, Nov. 19, 2013
- General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
- General Criteria: Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Ratings List
| Downgraded; CreditWatch Action | ||
|---|---|---|
| To | From | |
|
OnlineKazFinance Microfinance Organization LLP |
||
| Issuer Credit Rating | CCC+/Watch Dev/C | B/Stable/B |
| Kazakhstan National Scale | kzB+/Watch Dev/-- | kzBB+/--/-- |
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. A description of each of S&P Global Ratings' rating categories is contained in "S&P Global Ratings Definitions" at https://www.standardandpoors.com/en_US/web/guest/article/-/view/sourceId/504352 Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; or Stockholm (46) 8-440-5914
| Additional Contact: | Financial Institutions EMEA; Financial_Institutions_EMEA_Mailbox@spglobal.com |
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