Azernews.Az

By Gulgiz Dadashova

Last week, Fitch Ratings assigned the Azerbaijani state energy company's (SOCAR) proposed USD denominated senior unsecured notes a foreign currency senior unsecured rating of 'BBB-(EXP)'.

The agency reports that the final rating is contingent upon the receipt of final documentation conforming materially to information already received and details regarding the notes' amount, coupon rate and maturity. The proceeds from the notes issuance are expected to be used to fund the company's capex and other general corporate purposes.

SOCAR plans to issue the notes at the corporate level. Although SOCAR owns 100 percent of all its main cash generating subsidiaries, the notes do not benefit from a direct guarantee from SOCAR's operating subsidiaries. The bond prospectus includes covenants limiting distributions of net income, disposals of core assets, consolidations, negative pledges and cross default provisions.

Although just over half of the group's debt on June 30, 2012 was at the subsidiaries' level, Fitch does not presently consider senior unsecured creditors at the group level to be structurally subordinated given the low amount of earnings from subsidiaries.

Additionally, Fitch does not foresee strong asset recovery prospects for subsidiary debt holders in Azerbaijan and does not anticipate asset recovery at subsidiaries abroad to be large enough to encumber other senior unsecured creditors in a liquidation scenario.

Fitch has therefore assigned the notes an expected senior unsecured rating in line with SOCAR's IDR. Fitch may reassess its approach to the notes' rating if the current composition of operating profit and debt change in a way that prioritizes subsidiary debt holders over senior unsecured creditors at the group level.

SOCAR's ratings incorporate state support and are aligned with Azerbaijan's ('BBB-'/Stable). Wholly state-owned SOCAR represents the state's interests in the strategically important oil and gas industry and continues to receive equity injections from the state, eg, AZN190m in 2011 and a further AZN200m approved in 2012 but not yet transferred to SOCAR.

Also, Fitch views SOCAR's standalone business and financial profiles as commensurate with the 'BB' rating category. This is mainly driven by the company's adequate credit metrics compared with its Russian and international peers.

Fitch views positively the fact that in 2011 SOCAR signed second stage agreements regulating sales of Shah Deniz gas to Turkey and its transit to European markets that the company currently estimates at 2017, which should underpin project development.

Fitch forecasts SOCAR's FFO adjusted leverage to remain below 2x in 2012, but to increase above 2x by 2013. This leverage is still comfortable for the current rating.

The agency says that SOCAR's cash position of AZN1,006m at June 30, 2012 was sufficient to cover its short-term debt maturities of AZN656m on that date. A large portion of SOCAR's cash including short-term deposits is held at the state-owned International Bank of Azerbaijan ('BB'/Stable).

Fitch notes that SOCAR will need to repay or refinance the equivalent of $727 million in 2013. Thereafter, annual bond maturities do not exceed the equivalent of $400 million until 2017. Some 74 percent of SOCAR's debt at June 30, 2012 is denominated in USD including the $500 million bond maturing in 2017.

Earlier, Moody's Investors Service assigned a provisional Ba1 rating to the approximately $1.0 billion worth of notes to be issued by SOCAR. Outlook on the rating is stable, the agency reported.

SOCAR will use the proceeds of the loans for general corporate purposes, including refinancing its existing indebtedness and funding its upstream and downstream operations.

The Ba1 CFR reflects SOCAR's status as a fully integrated oil and gas company that enjoys either a share in, or a full control over, the country's oil and gas pipelines for the domestic and export markets.

The noteholders will benefit from standard debt protection covenants, such as limitation on distributions of net income, limitation on asset disposal, negative pledge, restrictions on mergers and reorganizations and a requirement to maintain minimum tangible net worth.

The stable outlook on the rating reflects SOCAR's robust financial metrics, supported by the favorable oil market environment; and the company's operating performance outlook.

Moody's said it would consider upgrading SOCAR to an investment-grade category if the company materially improves its overall information disclosure; demonstrates evidence of managing its reinvestment risk via efficient reserves additions; provides greater clarity with regard to its strategy, financing and investment policies; and demonstrates solid liquidity management.

SOCAR is involved in exploring oil and gas fields, producing, processing, and transporting oil, gas, and gas condensate, marketing petroleum and petrochemical products in domestic and international markets, and supplying natural gas to industry and the public in Azerbaijan. Three production divisions, two oil refineries and one gas processing plant, an oil tanker fleet, a deep water platform fabrication yard, two trusts, one institution, and 22 subdivisions are operating as corporate entities under SOCAR.

Joint ventures (including ventures in Georgia and Turkey), consortia, and operating companies established with SOCAR's participation, are doing business in different parts of the petroleum industry. SOCAR has representative offices in Georgia, Turkey, Romania, Austria, Switzerland, Kazakhstan, Britain, Iran, Germany and Ukraine and trading companies in Switzerland, Singapore, Vietnam, Nigeria, and other countries.