Eurobond issue to reduce cost of borrowing for SOCAR

Oil&Gas Materials 28 January 2012 13:39 (UTC +04:00)

Azerbaijan, Baku, Jan. 28 / Trend /

Trend Deputy Editor-in-Chief for Economic Affairs Ilaha Mammadli

The international rating agencies Fitch Ratings and Moody's Investors Service have recently assigned a rating to the upcoming debut Eurobond to be issued by State Oil Company of the Azerbaijan Republic (SOCAR).

The rating assignment will be a signal for strategic investors' great activity. This will allow SOCAR to place Eurobonds on the most favorable terms. The rating assignment was timely because SOCAR will begin road-show from January 30, that is, negotiating with investors in connection with the forthcoming bond placement.

Moody's expects that the Eurobond issuance will total up to $500 million.

SOCAR debut Eurobonds are planned to be issued to the amount of $ 500 million. The organizers of the issue are Royal Bank of Scotland (RBS), Citi bank and Deutsche bank. The bond payment term will not exceed 5-7 years.

Today, the company may draw credit resources from various foreign financial institutions without any problems taking into account the high ratings assigned by three internationally-recognized rating agencies. The large funds are oriented to their opinions. But the issue of Eurobonds, first of all, is necessary for SOCAR image. SOCAR officials also admit that getting the funds through Eurobonds placement is not a primary goal. It is aimed at increasing SOCAR level from the international side.

The agreement on the loan worth $ 750 million was signed with BNP Paribas SA in 2006 without state guarantees or other collateral. This has created the conditions for SOCAR to independently raise funds from international capital markets at reasonable rates in the future.

Taking into account SOCAR's plans to implement major investment projects, Eurobond issue can be considered as a preparatory stage for their implementation.
It is planned to use borrowed funds in financing some of them.

However, this is not the best time for the Eurobond issue now due to the crisis in Europe. The deliberate and balanced approach is required to place its securities in international capital markets during the crisis.

The crisis is over, but getting high ratings in a period of global instability. The international agencies reduce or completely withdraw ratings of countries and their entities. This enhances SOCAR's reputation as a stable company.

The bond placement will allow SOCAR to determine the level of fair value of loans for the company. This activity demonstrated by SOCAR in conditions of instability in the world markets, indicates that not only a name, but also a value of money, which it draws are important for the company.

So, the bond placement will become a signal for credit institutions. That is, the successful placement of securities will significantly reduce the cost of borrowing for SOCAR, which cost libor +2.5 percent. The company tries not to cross this threshold. Previously, the average rate on loans was libor + 5 percent.

Moody's Investors Service has assigned a provisional (P)Ba1 rating to SOCAR bonds and corporate rating.

This increases the opportunities in any commercial or financial transaction.

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).

SOCAR ratings take into account the presence of state support, as the company is fully state owned. It represents the state interests in the strategically important oil and gas industry. It is essential for the economy of the country because 43 percent of GDP in 2012 and 73 percent of budget revenue are planned to be ensured through hydrocarbons. Taking into account the fact that SOCAR bonds will be unsecured, they will cause the investors' great interest.
SOCAR investment rating assignment during the global economic crisis and the company's bonds during the debt crisis in Europe is significant in terms of investment attractiveness.

Taking into account that SOCAR intends to carry out the strategy of expanding the activity by implementing the intensive investment program worth $ 5.2 billion manat ($6 billion) till 2014 (excluding the obligations within the production sharing agreement), the implementation of this program, along with the planned construction of oil refinery within Petkim production area for approximately $ 4.4 billion, may require significant external financing.

Most of the oil and gas fields in Azerbaijan are developed by SOCAR at its own expense. SOCAR is a participant of all projects of developing the Azerbaijani fields with foreign participation, in particular such large blocks as the development of offshore oil and gas fields "Azeri-Chirag-Guneshli" and offshore gas condensate "Shah Deniz" field.

Today SOCAR develops markets in Georgia, Turkey, Ukraine, Romania and Switzerland very successfully. It implements large projects associated with the construction of refineries, construction and purchase of petrol stations, etc. The Central Asian markets will be SOCAR's another sphere of activity in the nearest future. In particular, the agreement has been already made to start construction of the refinery in Kyrgyzstan with a capacity of 2 million tons per year.

SOCAR is a co-owner of the largest Turkish petrochemical complex Petkim. The company sells oil in various world countries through its trading branch - SOCAR Trading.

Moreover, the company needs investments to expand its activity outside the country.

SOCAR has big plans within the country along with the work on the international market. In particular, SOCAR intends to further increase oil and gas potential of the country. At present, Azerbaijani proven gas reserves exceed 2.5 trillion cubic meters. The reserves will be increased in the future due to the plans of developing the perspective structures in the Azerbaijani sector of Caspian Sea. The large enterprises' joining SOCAR requires great investments to develop the gas and chemical industries in the country. There are ambitious plans to develop the largest complex on oil and gas processing and petrochemical production in the region. This is one of the largest projects envisaged within SOCAR development plan.

According to the forecasts, the construction of the new complex may require the investments worth $13-15 billion.

All these plans require a large amount of investments. This confirms the need to draw funds. It is possible as a result of placing the securities and drawing the loans. The most important thing is to draw everything on favorable terms.

Regardless of whether the rating of attracting investments, getting loans, issuing the securities, selling products or expanding the activities is used, ratings of internationally recognized agencies allow concluding the deals on more favorable terms while demonstrating its creditworthiness.

Credit rating is an effective means by which a company can report about its creditworthiness to investors who buy debt instruments, banks, suppliers and customers concluding long-term contracts.

Rating is also an important part of a common program to maintain relations with investors, helping to improve the total investment attractiveness.