Azerbaijani manat depreciation to provide SOCAR with cushion for decline in oil prices

Business Materials 2 March 2015 19:33 (UTC +04:00)

Baku, Azerbaijan, March 2


The recent 33.5 percent Azerbaijan manat depreciation will weaken the standalone credit profile of Azerenerji, Fitch Ratings says.

The impact on Azerbaijan Railways will be limited and it is likely to be broadly neutral for export oriented oil company SOCAR, the statement says.

The weaker credit profile of Azerenerji is unlikely to result in a downgrade, as its IDR is aligned with the 'BBB-'/Stable sovereign rating, due to strong links with the state and on-going support in the form of guarantees and equity injections.

Azerenerji is more exposed as almost 80% of its debt is denominated in foreign currencies, mainly in euros, dollars and Japanese yen. In contrast, almost all revenue is denominated in local currency and it has no significant hedging activities in place to mitigate this risk. However, the majority of loans are guaranteed by the state.

The forecasted deterioration of Azerenerji's financials may lead to a breach of covenants. This could require the company to renegotiate their covenants or the state to provide support to cure the breach. The agency expects this support would be forthcoming if needed, and note that a previous Azerenerji covenant breach was waived, the statement says.

The agency estimates that the depreciation will increase Azerenerji gross leverage metrics by about 1.5x on average in 2015-2016, other things being equal. However a downgrade is only likely in the event of a sovereign downgrade or if the agency believes the company's links with the government have weakened, for example as a result of weaker tangible support.

Although Azerbaijan Railways' debt is all foreign currency denominated it is better positioned compared to Azerenerji. This is because roughly two-thirds of its total revenue is from freight export/import and transit operations, international tariffs for which are set in Swiss francs and denominated by the company in dollars. Azerbaijan Railways' rating is also aligned with the sovereign.

Over 80 percent of SOCAR's debt is denominated in dollars, but at the same time the vast majority of revenues and trade receivables are also USD-linked, which will neutralise the impact on leverage ratios. The depreciation, and corresponding increase in manat denominated revenues, will provide a cushion for a decline in oil prices as a significant portion of SOCAR costs is in manat. The positive impact on financial performance may however be hindered in the medium term if wage and cost inflation pressure increases. SOCAR's rating is also aligned with the sovereign.

The depreciation is broadly neutral for the sovereign credit profile. It will assist fiscal and external adjustment to the lower oil price. The sharp appreciation of the manat's real effective exchange rate as a result of the depreciation in 2014-2015 of the Russian rouble and Turkish lira would, if sustained, have hampered efforts to develop the non-oil economy in Azerbaijan, the statement says.

The Central Bank of Azerbaijan has set the manat rate versus the US dollar at 1.05 manat per dollar since February 21. The rate decreased by 33.9 percent.

The official exchange rate of the US dollar versus the Azerbaijani manat was set at 1.0496 manat as of March 2.