Fitch asigns SOCAR's USD notes expected senior unsecured 'BBB-(exp)' rtg
Fri Jan 27, 2012 6:14am EST
Jan 27 - Fitch Ratings has assigned State Oil Company of the Azerbaijan Republic's (SOCAR) proposed notes an expected foreign currency senior unsecured rating of 'BBB-(exp)', in line with SOCAR's Long-term Issuer Default Rating (IDR) of ('BBB-'/Stable).
The final rating is contingent upon the receipt of final documentation conforming materially to information already received and details regarding the amount, coupon rate and maturity. The proceeds from the notes issuance are expected to be partially used to fund the company's capex and other general corporate purposes.
SOCAR plans to issue the notes at the corporate level. Although the notes do not benefit from any direct upstream guarantees from SOCAR's operating subsidiaries, the prospectus includes covenants limiting corporate reorganisation, negative pledges and put options upon any change of status. In addition, SOCAR owns 100% of all main cash generating subsidiaries. The notes will also have the benefit of a cross default clause.
Although almost half of the group's debt as of year end 2011 resides 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 (2% of group EBIT in H111). For example, the main debt holder among subsidiaries is SOCAR-Turcas (about 29% of total outstanding debt at end-2011) that generated only 4% of total EBIT in H111.
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' 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 as SOCAR is wholly state-owned, represents the state's interests in the strategically important oil and gas industry, and continues to receive equity injections from the state (AZN190m in 2011), in accordance with Fitch's parent and subsidiary rating linkage methodology.
In Fitch's view, although SOCAR continues to benefit from relatively strong links with the Azerbaijan state ('BBB-'/Positive), full and timely financial support, which would allow full rating alignment with the sovereign, is not certain without robust legal ties (e.g. explicit guarantees). Government guaranteed debt accounted for only 4% of the group's total debt at end-H111. Therefore, the Outlook on SOCAR's Long-term IDR remained Stable after the Outlooks on Azerbaijan's Long-term IDRs were revised to Positive on 17 May 2011.
SOCAR is relatively small in scale, with H111 oil and gas production (excluding equity stakes) of 266,869 barrels of oil equivalent per day. Fitch expects 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 its Russian peers.
The ratings also reflect the company's adequate credit metrics compared with its Russian and international peers, as demonstrated by its 2010 operating EBITDA margin of 37% and funds from operations (FFO) adjusted leverage of 1.7x. Fitch forecasts SOCAR's FFO adjusted leverage to remain below 2x in 2011, but to increase to above 2x by 2013 (including capex for the construction of the refinery at Petkim's facilities).