Baku, Azerbaijan, March 1
By Maksim Tsurkov – Trend:
Standard & Poor's Global Ratings affirmed its 'BB/B' long- and short-term corporate credit ratings on Azerbaijan-based electricity utility Azerenerji JSC, according to S&P message.
“The affirmation largely reflects our view that the likelihood that Azerenerji will receive government support, if needed, continues to be almost certain. We understand the government has so far been able and willing to cover any liquidity shortages at Azerenerji, including its payments of maturing debt and interest, and we expect this will continue,” reads the message.
The government guarantees most of the company's debt as of the end of 2016 and, in line with the Cabinet of Ministers decision, will provide sufficient equity injections to Azerenerji to support repayments of foreign currency loans over 2016-2025, according to S&P.
“We understand that the government has budgeted adequate financial injections to cover the company's debt and interest payments due in 2017, if needed. We think the Ministry of Finance closely monitors Azerenerji's debt payments and that, in line with the new government decree, government-related entities in the country, including Azerenerji, cannot incur any new borrowings without the government's approval.”
“We assume that without ongoing and extraordinary state support, Azerenerji would face difficulties in servicing its debt because of high leverage and unsustainable capital structure. We consequently continue to assess its stand-alone credit profile (SACP) at 'ccc+',” read the message.
There's a wide gap between our sovereign ratings on Azerbaijan (BB+/Negative/B) and our 'ccc+' SACP on Azerenerji, said S&P.
“Although the government provides financial aid to cover the company's ongoing debt payments, we don't see a strategy aiming for substantial improvements at company level. Such a strategy would include but not be limited to marked deleveraging, positive changes in the regulatory framework so that the tariffs become sufficient to cover all operating and financial expenses as well as capital expenditures, or long-term government commitments to service all of Azerenerji's existing and future debt,” reads the message.
“We consequently don't equalize the ratings on Azerenerji with those on the sovereign. Instead, we continue to apply a one-notch downward adjustment from our long-term sovereign rating to arrive at our long-term rating on Azerenerji,” S&P said.
In December 2016, Azerenerji increased its tariffs by about 33 percent to compensate a 50-percent jump in prices of gas purchased from the company's sole supplier, Azerbaijan's state oil company SOCAR, reads the S&P message.
S&P said it does not anticipate fresh tariff revisions in 2017.
“We view the final outcome of the recent tariff hike as neutral for the company's financial results. We expect the company will report positive results from operating activities but assume Azerenerji will remain loss-making because of significant finance expenses and foreign exchange losses (as of end of 2016 about 85 percent of the debt portfolio was in foreign currencies).”
S&P said it anticipates specific steps from the Azerbaijani government to improve Azerenerji's stand-alone performance as a strategic roadmap for the development of utilities has been approved. Such steps would include but not be limited to regulatory framework changes or additional long-term measures by the government to deleverage the company.
“Under our base case, the company's stand-alone credit quality will remain vulnerable, with an unsustainable capital structure in 2017,” reads the message.
“We expect the Ministry of Finance will continue to monitor the company's liquidity position and provide financial support to cover maturing debt payments and other liquidity shortages if needed. We also understand that any new significant investment projects, which Azerenerji will have to undertake in line with the government's strategy and the strategic roadmap, will be financed by the equity injections from the shareholder. In our base case, we assume no additional external debt to be borrowed during 2017.”
“We also assume the company's structure and current asset composition will remain unchanged in the near term,” S&P said.