Fitch affirms Azerbaijan Railways CJSC at 'BBB-'
By Nazrin Gadimova
International Rating Agency Fitch Ratings has affirmed Azerbaijan Railways Closed Joint Stock Company's (ADY) long-term issuer default ratings (IDR) at 'BBB-'. The outlook is stable.
ADY is the wholly state-owned operator of Azerbaijan's national railway system (BBB-/Stable) and its rating continued to be aligned with that of the sovereign, Azerbaijan, its sole shareholder, reflecting continued relatively strong links with the state.
The rating alignment primarily reflects Fitch's assessment of ADY's links with its parent as relatively strong, in accordance with Fitch's Parent and Subsidiary Rating Linkage criteria. Fitch's assessment considers ADY's high strategic importance to the national economy, including its position in transport of export-bound oil products and oil as well as freight transit, which contribute significantly to Azerbaijan's economy.
The agency also views the operational links as strong due to the government's involvement in tariff setting, capex planning and funding, financial and business strategy and policy setting, the report of the agency said.
Fitch anticipates that ADY will remain 100 percent state owned in the foreseeable future, but notes that ADY's debt is not guaranteed by the government.
"ADY's current 1.4 billion manats investment program over 2014-2017 was initiated by the Transport Ministry back in 2010," the report said. "The Azerbaijani government continues to finance a large share of the investment program via loans borrowed by the government without recourse to ADY (390 million manats), as well as equity injections while the rest is expected to be funded with ADY's cash flows. We view this as a continuing sign of tangible support from the government. A change in the proposed funding terms may prompt Fitch to review its assessment of the strength of state support for ADY."
In 2013, ADY reported revenue of 534 million manats, up 5.7 percent year-on-year, the analysts of the agency said.
"Its EBITDA reached 235 million manats, resulting in an EBITDA margin of about 44 percent compared with 41 percent in 2012. Freight transportation revenue continued to dominate and accounted for about 67 percent of total revenue amounting to 360 million manats, with an equal split between export/import and transit operations," according to the message.
Fitch also notes that oil products and oil transportation continued to prevail in ADY's freight transportation revenue, making up 67 percent of freight transportation revenue or 45 percent of total revenue in 2013. Freight transportation revenue increased 7.3 percent in 2013; this was partially driven by a 2.5 percent rise of oil and oil transportation and an increase of about percent of dry cargo transportation volumes. This was also partially due to an average tariff increase of about 3.8 percent. We expect railway traffic to increase upon commissioning of the Baku-Tbilisi-Kars rail link in 2015, enabling deliveries from Baku to Istanbul and further to Europe, according to the report.
Azerbaijan Railways ranks 57th in the world for the length of railroads. About 72 percent or 2,117 kilometers of the total length of operated rail lines is used for cargo transportation and does not include industrial rail lines.