Azerbaijan's Entrepreneurship Development Fund gets its first rating from S&P

S&P Global Ratings today assigned its 'BB-/B' long-and short-term issuer credit ratings to Entrepreneurship Development Fund Of The Republic Of Azerbaijan (EDF).

Report informs, citing S&P, that the outlook is stable.

The starting point for our long-term rating on EDF is the anchor of 'b-' for finance companies (fincos) in Azerbaijan.

"It is two notches below the 'b+' anchor for banks, based on economic and industry risk scores of '9' for Azerbaijan under our Banking Industry Country Risk Assessment (on a scale from 1 [lowest risk] to 10 [highest risk]). We believe fincos in Azerbaijan face incrementally higher industry risk than banks because they are more dependent on market-sensitive funding, owing to their lack of access to central bank funding, and they operate under weaker regulatory oversight and a weaker institutional framework, with higher competitive risk and typically less stable revenue through economic cycles," the agency said.

According to the statement, EDF has a unique role of providing loans to financial institutions in Azerbaijan to further lend to entrepreneurs. With assets of about Azerbaijani new manat (AZN) 828 million ($487 million) as of mid-2022, EDF is significantly smaller than Azerbaijan's top-three commercial banks (International Bank of Azerbaijan, PASHA Bank, and Kapital Bank), which have assets of over AZN6.8 billion each.

EDF provides loans in Azerbaijan manat, with a 1% interest rate to about 40 domestic operating commercial banks and credit unions to further lend to entrepreneurs at 5%, which is significantly below the market rates and enables entrepreneurs to borrow at affordable rates.

"We note that EDF's regulatory oversight is stronger than that of other fincos in Azerbaijan, with mid-level officials of the central bank and the government being on EDF's supervisory board. In October 2021, there was a presidential decree establishing the Azerbaijan Business Development Fund, which was set up through reorganizing and merging EDF with Azerbaijan Investment Co. (AIC). The main economic purpose of AIC is capital investments into Azerbaijan's non-oil sector. However, operationally the merger has not started yet. We do not expect any material integration and operational risks from the merger of these two government-related entities," the statement says.

EDF's stand-alone credit profile (SACP) includes a positive one-notch adjustment because of the relative strength of its overall creditworthiness compared with other fincos with similar creditworthiness. This reflects EDF's robust capitalization (well in excess of our 15% RAC threshold for a very strong assessment) and no outstanding debt.

"We consider EDF a government-related entity and believe there is a moderately high likelihood that EDF will receive timely and sufficient support from the Azerbaijan government in case of need. Therefore, we add one notch of government support to EDF's SACP," the statement reads.

EDF was re-established as a public legal entity in 2018 by presidential decree. The state owns 100% of EDF through the Ministry of Economy. EDF carries an important public policy role in the sustainable development of entrepreneurship in the countryside (not the capital of Baku) by carrying out funding mechanisms and awareness-raising activities.