Baku. 21 January. REPORT.AZ/ Moody's Investors Service has today said that it views as credit neutral for State Oil Company of the Azerbaijan Republic (SOCAR, Ba1 stable) the announcement on 18 January that it has offered to acquire any and all of its outstanding $500 million 5.45% senior unsecured notes due February 2017 (the Notes).
Report informs referring to Moody's website, on 18 January, SOCAR launched an invitation to holders of its outstanding Notes to tender them for purchase by the company at 102% of par value. The offer expires on 26 January and has an expected settlement date of 29 January.
Moody's views this transaction as credit neutral given the uncertainty as to the amount of Notes that the note holders will decide to tender. This view also takes into account that these Notes represent a fairly small share of the company's total debt, at approximately 6% as of 30 June 2015. However, Moody's positively notes that this transaction will allow SOCAR to reduce its scheduled debt repayments in 2017, which currently total $946 million, thereby improving its liquidity profile.
The company maintains an adequate liquidity profile with a substantial cash cushion of approximately $2.7 billion as of 30 June 2015, of which 89% was denominated in foreign currencies. The company had approximately $8.2 billion total debt as of the same date, of which about 91% was denominated in foreign currencies. The company's cash cushion matches the company's short-term debt of approximately $2.6 billion as of 30 June 2015.
Although this debt reduction would positively impact the company's leverage, Moody's notes that Brent oil prices fell to below $30 per barrel in January 2016, which will exert negative pressure on the company's operating cash flows and leverage in 2016. Meanwhile, the substantial Azerbaijan manat devaluation in December 2015 will reduce the financial covenant headroom as of year-end 2015 and in 2016. The company has a maintenance covenant on a number of its term loans by which tangible net worth of the company is not to fall below $4 billion. This covenant is tested on a semi-annual basis. As of 30 June 2015, SOCAR was in compliance with this covenant, with a tangible net worth of approximately $8.6 billion.
On 21 December 2015, the Central Bank of Azerbaijan abandoned its policy of pegging the value of the manat to the US dollar and euro, and adopted a floating exchange-rate regime. The manat quickly fell to 1.55 USD/AZN from 1.05 USD/AZN previously, a depreciation of 32%. This depreciation is likely to create sizeable foreign-exchange loss in H2 2015 owing to the revaluation of the company's largely foreign-currency denominated debt, eroding the company's equity and the headroom under its tangible net worth covenant as of year-end 2015.