Fitch affirms SOCAR’s new bond emission at 'BBB-'

Fitch affirms SOCAR’s new bond emission at
# 04 March 2013 09:19 (UTC +04:00)

The final rating is contingent upon the receipt of final documentation conforming materially to information already received and details regarding the notes amount, coupon rate and maturity. The proceeds from the notes issuance are expected to be used to fund the company's capex and other general corporate purposes.

SOCAR plans to issue the notes at the corporate level. Although SOCAR owns 100% of all its main cash generating subsidiaries, the notes do not benefit from a direct guarantee from SOCAR's operating subsidiaries. The bond prospectus includes covenants limiting distributions of net income, disposals of core assets, consolidations, negative pledges and cross default provisions.

SOCAR's ratings incorporate state support and are aligned with Azerbaijan's ('BBB-'/Stable). Wholly state-owned SOCAR represents the state's interests in the strategically important oil and gas industry and continues to receive equity injections from the state, eg, AZN190m in 2011 and a further AZN200m approved in 2012 but not yet transferred to SOCAR.

SOCAR is relatively limited scale, with 2011 oil and gas production (excluding equity stakes) of 263 thousand barrels of oil equivalent per day (mboepd). Fitch expects future 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 those of its Russian peers.

The ratings factor in SOCAR's intensive capex programme of AZN5.3bn over 2012-2015, including its obligations under the PSAs. In addition, the group plans to build a STAR refinery in Turkey with 10m tonnes of crude oil refining capacity to be completed in 2017.

Fitch forecasts SOCAR's FFO adjusted leverage to remain below 2x in 2012, but to

increase above 2x by 2013. This leverage is still comfortable for the current rating.

SOCAR's cash position of AZN1,006m at 30 June 2012 was sufficient to cover its short-term debt maturities of AZN656m on that date. A large portion of SOCAR's cash including short-term deposits is held at the state-owned International Bank of Azerbaijan ('BB'/Stable). Fitch notes that SOCAR will need to repay or refinance the equivalent of USD727m in 2013. Thereafter, annual bond maturities do not exceed the equivalent of USD400m until 2017.

74% ofSOCAR's debt at 30 June 2012 is denominated in USD including the USD500m

bond maturing in 2017.

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