The Outlook revision reflects Kaztel’s reduced refinancing risk following repayment of its USD350m syndicated loan due in July 2010. The loan was refinanced with new long-term (five-10 years) borrowings in late 2009. Fitch currently views the company’s refinancing risk as moderate since the share of short-term debt in its portfolio is now estimated to be below 25%. Fitch believes that Kaztel now has sufficient liquidity to cover its short-term debt in full.

The Outlook revision also factors in the expected sale of Kaztel’s 51% stake in its mobile subsidiary, Mobile Telecom-Service LLP (MTS), to Tele2 announced in December 2009. Fitch views the disposal as positive for Kaztel’s credit profile, as MTS has so far been unprofitable, is capex-intensive and highly leveraged. Fitch estimates that the MTS’s divestment will enable Kaztel to increase its EBITDA margin by around four percentage points and reduce leverage by 0.5x. In addition, the disposal will generate some USD76m in cash for Kaztel, increasing the company’s liquidity.

At the same time, Kaztel’s ratings continue to be constrained by substantial foreign currency risk, as nearly all of its debt is denominated in or linked to foreign currencies while the company’s revenue is predominantly in tenge.

Fitch further notes that Kaztel’s cash is mainly deposited with Kazakh banks that have substantially lower credit ratings than Kaztel. Although the risk that Kaztel’s cash would be blocked has reduced with the improvement of the banks’ liquidity, Kaztel’s potential access to this cash remains a concern. As a result, in assessing Kaztel’s credit profile, Fitch places greater emphasis on Kaztel’s gross rather than net leverage.