Azerbaijan, Baku, June 18 / Trend A. Akhundov /
Standard & Poor's Ratings Services today assigned its 'B' long-term corporate credit rating to Azerbaijan-based diversified company Baghlan Group FZCO. The outlook is stable, Standard & Poor's said today.
The rating reflects our assessment of Baghlan's business risk as vulnerable and its financial risk as aggressive.
Baghlan generated Azerbaijan manat (AZN) 144 million (about €137 million) in adjusted EBITDA in 2012. It operates in five key segments: freight forwarding, public transportation, construction project management, equipment trading, and oil and gas.
The rating is constrained by Baghlan's position as a small player that relies heavily on a limited number of large contracts. These are mainly in road construction for the government-related Azeryolservice and in freight forwarding, where the company enjoys a hefty 50% discount from Azerbaijan Railways thanks to accumulating large transportation volumes. Any changes to these contracts could significantly affect Baghlan's profits or cash flow, in our view. Baghlan also faces large working capital fluctuations (notably related to the road construction project), which may pressure cash flows and liquidity, despite some cushioning from its back-to-back structuring with suppliers. Lastly, Baghlan is undertaking a new oil and gas project that will require sizable capital expenditures and may be subject to execution risks, the statement said.
On the upside, Baghlan benefits from diversification by business segment and favorable profitability levels under its existing contracts. Azerbaijan's developing business environment currently creates barriers to entry to Baghlan's key niche markets, although this could change in the future. Baghlan's debt of AZN233 million on Dec. 31, 2012, is quite manageable. In our base-case scenario, we assume that the company will maintain its generally prudent approach to leverage. Baghlan's invests in its oil and gas project via a production sharing agreement, which helps it to share capital expenditures with its partners and enables it to recover investments relatively quickly when production increases are achieved. The company's projects in other segments require only small maintenance capital expenditures, the statement said.
The stable outlook reflects our expectation that Baghlan will maintain manageable liquidity over the next few years, and avoid any further large working capital outlays or any deterioration in the key terms of its largest contracts. We expect Baghlan to maintain healthy headroom under the covenant that limits its ratio of debt to EBITDA at 2.5x. We have not factored any major debt-financed acquisitions into our base-case scenario.
"We could consider lowering the rating on Baghlan if we observed a squeeze on liquidity, a significant negative change in the profitability of key contracts, or the company made large debt-financed acquisitions. We have not factored these possibilities into our base-case scenario, however," the statement said.
According to Standard & Poor's, rating upside is limited in the short to medium term because of the company's limited size and the inherent high volatility in its business.