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April 2 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has downgraded Azerbaijani building materials company Baghlan Group FZCO’s (Baghlan) Long-term Issuer Default Rating (IDR) to ‘Restricted Default (RD)’ from ‘B-', and withdrawn the rating.
Fitch has also withdrawn the expected rating of ‘B-(EXP)’ on Baghlan’s planned issue of guaranteed notes in December 2013, which failed to take place. Accordingly, Fitch will no longer provide ratings or analytical coverage for Baghlan.
Baghlan’s downgrade reflects the non-payment of debt obligations on its unrated USD150m 14.75% loan participation notes (LPN). The planned bond issue was intended to refinance the majority of its debt obligations.
The ratings have been withdrawn as Fitch no longer has sufficient information to maintain the ratings. The current liquidity position of the group and its ability to meet maturing debt obligations including with local banks cannot be assessed.
Fitch was recently notified that Baghlan failed to pay the USD19m interest payable on 27 December 2013 on its USD150m LPNs. The LPNs were in technical default on 1 January 2014 following a grace period. As of 7 March 2014 part payment of USD8m had been made.
Failure to Refinance
Baghlan failed to refinance and extend the majority of its debt facilities as the company did not proceed with its planned bond issue in December 2013. Access to medium-term bank funding is constrained by an under-developed banking market in Azerbaijan. Although Baghlan had largely been dependent on local bank funding it had issued unrated LPNs in June 2012.
Challenging Debt Maturities
Refinancing risk and its limited ability to extend short-term bank lines is a key rating constraint. Fitch expects that large portions of Baghlan’s assets are likely to be pledged as collateral to aid refinancing. The agency also does not expect Baghlan to be able to raise sufficient funds from banks to refinance its USD150m amortising LPNs with a final maturity in 2015.
Poor Cash Flow Conversion
Solid P&L profits posted over the last three years have not fully converted into cash flow. Negative working capital outflows during 2011 and 2012 have resulted in a working capital requirement of around AZN181m as at FYE12 (inventory plus current receivables less current payables). Unless there is a reversal in the working capital position and payment of the high receivables balance liquidity problems are likely to persist.
Deferred Consideration from Asset Disposals
Although management has indicated that a number of assets have been or are in the process of being divested these are subject to transaction close and cash payment. The most material relates to the disposal of its residential and multi-purpose property portfolio units in central Baku. However, any proceeds are likely to be used to repay domestic bank debt.
Diversified Operating Segments
The operating risk profile benefits from its diversified nature, although concentration on large contracts is a weakness. Transport and logistics services benefit from a strong domestic market share, recurrent cash flow and privileged contracts with government bodies. Construction is primarily focused on one large civil works contract, with a few more contracts in the order book for FY14 and FY15. Although this is higher-risk than other segments with its volatile working capital movements and fragmented market share, profit margins and growth prospects are strong. Oil and gas operations are in a run-up phase and still depend on the group for financial support.