(The following statement was released by the rating agency)
March 1 - Fitch Ratings has assigned State Oil Company of the Azerbaijan
Republic's (SOCAR) proposed USD denominated senior unsecured notes an expected
foreign currency senior unsecured rating of 'BBB-(EXP)'.
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
SOCAR plans to issue the notes at the corporate level. Although SOCAR owns 100%
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 at 30 June 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. For example, the main debtor among
subsidiaries was SOCAR Turkey Enerji A.S., which accounted for about 31% of
total outstanding debt at 30 June 2012 but had a negative EBIT of minus AZN56m
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 prioritises subsidiary debt holders over senior
unsecured creditors at the group level.
State Support-Driven IDR
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.
'BB' Stand-Alone Profile
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, eg, 2011
operating EBITDA margin of 27% and FFO adjusted leverage of 1.2x.
Limited Scale of Operations
SOCAR is relatively limited scale, with 2011 oil and gas production (excluding
equity stakes) of 263 thousand barrels of oil equivalent per day (mboepd). Fitch
expects future production growth to be driven primarily by output expansion
under SOCAR's major production-sharing agreements (PSAs). As SOCAR operates
mature oil and gas fields, its production costs are high compared with those of
its Russian peers.
Higher Gas Sales Expected
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.
Large Capex Programme
The ratings factor in SOCAR's intensive capex programme of AZN5.3bn over
2012-2015, including its obligations under the PSAs. In addition, the group
plans to build a STAR refinery in Turkey with 10m tonnes of crude oil refining
capacity to be completed in 2017.
Leverage Likely to Increase
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
- Sovereign Rating Action and State Support
SOCAR's ratings could be affected by a sovereign rating action. Evidence of
weakening state support would be negative for SOCAR's ratings. An increase in
the level of state support, eg., government guarantees for a large portion of
the company's debt, coupled with a sovereign upgrade would be positive for its
- Capex and Acquisitions
An aggressive investment programme and/or acquisitions resulting in a
significant and sustained deterioration of credit metrics would be negative for
LIQUIDITY AND DEBT STRUCTURE
- Satisfactory Liquidity
SOCAR's cash position of AZN1,006m at 30 June 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).
- Large Debt Maturities in 2013
Fitch notes that SOCAR will need to repay or refinance the equivalent of USD727m
in 2013. Thereafter, annual bond maturities do not exceed the equivalent of
USD400m until 2017.
- USD-Denominated Debt
74% ofSOCAR's debt at 30 June 2012 is denominated in USD including the USD500m
bond maturing in 2017.
(Caryn Trokie, New York Ratings Unit)