Standard & Poor’s downgrades rating of 'Azerenerji' OJSC

Baku. 3 February. REPORT.AZ/ Rating of Azerenerji OJSC, the national energy operator, has been brought in conformity with Azerbaijan sovereign rating.

Report informs, Standard & Poor’s Ratings Services revised its outlook on Azerbaijan-based vertically integrated electricity utility Azerenerji to negative from stable.

“At the same time, we affirmed our ’BBB-’ long-term and ’A-3’ short-term corporate credit ratings on Azerenerji. The rating action mirrors that on the sovereign rating. It reflects our view that the Azerbaijan government’s ability to provide support to Azerenerji in a financial stress scenario could weaken, and that a downgrade of Azerbaijan (BBB-/Negative/A-3) would likely result in a downgrade of Azerenerji”, - the agency says.

According to Standard & Poor’s, the rating on Azerenerji reflects its assessment of an "almost certain" likelihood that Azerbaijan would provide timely and sufficient extraordinary support to the company in the event of financial distress, according to the agency’s criteria for government-related entities, and its assessment of Azerenerji’s stand-alone credit profile (SACP) as ’b’.

“Our assessment of an "almost certain" likelihood of state support is based on our view of Azerenerji’s:

"Critical" role for the government, since it is the state’s largest electric utility and the government arm for implementing strategies in the electricity sector. Furthermore, the state’s economic development and social mandates ensure reliable and affordable electricity provision, in our view; and "Integral" link with the government, given its 100% ownership and our expectation that this will not change in the next three years. The state guarantees approximately 35% of the company’s debt, and direct state borrowings comprise 61% of the company’s debt portfolio (excluding accrued interest and leasing). The Azerbaijani government also closely oversees Azerenerji’s operations and strategies, and the company understands that a default would put the sovereign’s reputation at risk. The company’s president is appointed by the president of Azerbaijan, whose sign-off is also required for Azerenerji’s new state-guaranteed borrowings”, - the agency says.

The Azerbaijani government’s strong track record of financial support also underlines its commitment to Azerenerji. This includes equity injections, debt guarantees, direct state borrowings, asset transfers, low-interest-rate loans, and financial aid provisions. Although Azerenerji is subject to various taxes, the government has a history of approving tax payment delays for the company. In addition, Azerenerji’s payables of about US$2.0 billion to the sole fuel provider, state-owned SOCAR, were written off with the government’s consent in 2010. In the same year, Azerenerji’s receivables of a similar amount from other state companies were also written off.

The assessment of the SACP as ’b’ is based on the agency’s view of Azerenerji’s business risk profile as "weak" and its financial risk profile as "highly leveraged."

The negative outlook on Azerenerji reflects that on the sovereign.

“In accordance with our criteria for rating government-related entities, we equalize the ratings on Azerenerji with those on Azerbaijan, owing to our assessment of an "almost certain" likelihood of extraordinary government support to the company if needed. Any downward revision of the sovereign rating will trigger a similar rating action for Azerenerji”, - the agency says.

A rating action on Azerbaijan would result in an equivalent action on Azerenerji.

“If we were to lower our assessment of the likelihood of extraordinary government support by one category to "extremely high," we would lower the long-term rating on Azerenerji by two notches, if all other factors remained unchanged. That might stem, for instance, from lower government focus on the sector, deterioration of proven financial support, or a weakening of the government’s ability to provide aid to the company”, - the agency says.

In addition, any weakening of Azerenerji’s SACP, owing to an unexpected funding shortfall or higher investments than currently planned, could cause the agency to revise down both the SACP and its opinion of the likelihood of extraordinary government support, reflecting the government’s failure to address such issues in a full and timely manner.

The agency might revise the outlook to stable if it revised the outlook on the sovereign rating to stable.