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S&P rates Azerbaijan Railways

22 June 2012 09:55 (UTC +04:00)

The outlook is stable.

Rationale The rating on Azerbaijan Railways is based on our assessment of the company’s stand-alone credit profile of ’bb-’, as well as on our opinion that there is a "very high" likelihood that the government of the Republic of Azerbaijan (BBB-/Stable/A-3) would provide timely and sufficient extraordinary government support to Azerbaijan Railways in the event of financial distress.

In accordance with our criteria for government-related entities, we base our view of a "very high" likelihood of extraordinary government support on our assessment of Azerbaijan Railways’:
-- "Very important" role for the Azerbaijani government, in light of Azerbaijan Railways’ monopoly position as the owner and manager of the national rail infrastructure and rolling stock. In our view, Azerbaijan Railways plays a key role in implementing Azerbaijan’s infrastructure development plan, which we understand is one of the government’s highest priorities.

-- "Very strong" link with the government of Azerbaijan, given the state’s 100% ownership of Azerbaijan Railways; the government’s role in appointing Azerbaijan Railways’ senior management; and our understanding that Azerbaijan Railways will not be privatized in the medium term.

The ’bb-’ SACP reflects our assessment of Azerbaijan Railways’ business risk profile as "fair" and its financial risk profile as "aggressive." The "fair" business risk profile is supported by Azerbaijan Railways’ status as the monopoly operator of rail infrastructure in the country and its track record of good profitability. These strengths are offset by Azerbaijan Railways’ aging infrastructure and rolling stock that is in need of development, and by competition from road traffic and oil pipelines for freight volumes. In our opinion, the company, together with the Azerbaijani economy, is heavily exposed to changes in the global demand for oil.

The "aggressive" financial risk profile reflects Azerbaijan Railways’ low leverage measures. These are offset by significant negative free operating cash flows due to high capital expenditure (capex). In addition, there is no track record of the Azerbaijani government providing the company with material levels of cash to fund capex because this was not previously required. The "aggressive" financial risk profile also reflects the underdeveloped nature of the Azerbaijani banking system.