London, 07 April 2021 -- Moody's Investors Service ("Moody's") has today
changed to positive from stable the outlook of State Oil Company of the
Azerbaijan Republic (SOCAR). Concurrently, Moody's has affirmed
SOCAR's Ba2 corporate family rating (CFR), Ba2-PD probability
of default rating (PDR), b1 baseline credit assessment (BCA),
and Ba2 rating of SOCAR's senior unsecured notes.
Today's rating action follows a sovereign rating action on Azerbaijan
which took place on 6 April 2021, during which Moody's changed the
outlook on Azerbaijan's rating to positive from stable and affirmed the
long-term issuer and senior unsecured debt ratings at Ba2.
For additional information, please refer to the related announcement:
https://www.moodys.com/research/Moodys-changes-outlook-on-Azerbaijans-rating-to-positive-from-stable--PR_442273.
RATINGS RATIONALE
Today's rating action is in line with the sovereign rating action
and reflects SOCAR's strong credit linkages with the state,
as well as its exposure to Azerbaijan's operating and macroeconomic environment.
The positive outlook on Azerbaijan's rating reflects Moody's assessment
that governance and in particular policy effectiveness is improving,
albeit from a low base, which may raise the resilience of the government's
credit profile. In particular, enhancements to the monetary
and macro policy framework may promote stability in the external and banking
sectors in the face of shocks, while continued effective use of
sizeable fiscal buffers would allow counter cyclical spending and limits
the deterioration in the government's fiscal and debt metrics.
The affirmation of Azerbaijan's Ba2 rating balances credit strengths from
the country's sizeable net creditor position that underpins fiscal strength
and lowers government liquidity and external vulnerability risks,
as well as relative domestic political stability that supports the implementation
of oil and gas projects, against credit challenges including still
limited prospects for economic diversification, longstanding institutional
and governance weaknesses, and geopolitical tensions with neighbouring
Armenia.
As a result, Moody's expects that operating and macroeconomic
environment for SOCAR will gradually improve, supporting its credit
profile.
Given that SOCAR is 100% state owned, Moody's applies
its Government-Related Issuers (GRI) methodology to determine the
company's CFR. SOCAR's CFR of Ba2 factors in (1) the company's
BCA of b1, which measures its standalone credit strength,
excluding any extraordinary government support; (2) the Ba2 local-currency
rating of the Government of Azerbaijan, with a positive outlook;
(3) the very high default dependence between the state and the company;
and (4) the high probability of the government providing support to the
company in the event of financial distress.
SOCAR's b1 BCA factors in (1) the company's key role in the oil and gas
sector of Azerbaijan and the national economy; (2) its sustainable
hydrocarbon production volumes; (3) Moody's expectation that
SOCAR's credit metrics will improve in 2021 driven by a recovery
in oil and gas prices; (4) the company's adequate liquidity,
underpinned by substantial cash balances and a comfortable debt maturity
schedule; and (5) its close links with the Azerbaijan government,
which has accumulated substantial reserves and should be in a position
to provide financial support to the company if needed.
The BCA also takes into account (1) the company's sizeable trading operations,
which dent its consolidated profitability margins, inflate leverage
and limit predictability of financial results; (2) uncertainty regarding
the execution of two put options provided by the SOCAR group to Goldman
Sachs International (A1 stable) in 2014-15 in relation to shares
in SOCAR's certain assets in Turkey, with a total amount of
AZN2.7 billion as of 31 December 2019, which expire in 2021
and, if exercised, may exert pressure on SOCAR's liquidity;
and (3) complex organisational structure of the SOCAR group and lack of
transparency and disclosure with regard to foreign assets and transactions
with shares in various subsidiaries and affiliates.
RATIONALE FOR THE POSITIVE OUTLOOK
The positive outlook on SOCAR's rating is in line with the positive
outlook on Azerbaijan's sovereign rating and reflects its strong positioning
within its current rating category, with a potential for an upgrade
if Moody's were to upgrade Azerbaijan's sovereign rating,
provided there is no material deterioration in the company's specific
credit factors, including its operating and financial performance,
market position, credit metrics and liquidity, and no weakening
in the probability of extraordinary state support in the event of financial
distress.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade SOCAR's rating if it were to upgrade Azerbaijan's
sovereign rating, provided there is no significant deterioration
in the company's specific credit factors, including its operating
and financial performance, market position, credit metrics
and liquidity, and no weakening in the probability of extraordinary
state support in the event of financial distress.
Moody's could downgrade SOCAR's rating if it were to downgrade Azerbaijan's
sovereign rating or there is an evidence that the government's capacity
and willingness to provide extraordinary support to SOCAR are diminishing,
or in case of state measures that would significantly impair SOCAR's credit
profile (including unfavourable regulatory developments or adverse changes
in the taxation regime, significant equity withdrawals or a growing
exposure to the domestic and international infrastructure projects of
the state if the company does not have sufficient capacity to fund such
projects). Moody's could also downgrade the rating if SOCAR's
retained cash flow (RCF)/net debt declines below the mid-teens
in percentage terms and EBIT/interest expenses declines below 3.0x,
both on a Moody's-adjusted and sustained basis, or if its
liquidity deteriorates significantly.
PRINCIPAL METHODOLOGY
The methodologies used in these ratings were Integrated Oil and Gas Methodology
published in September 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1172345,
and Government-Related Issuers Methodology published in February
2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of these methodologies.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
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same series, category/class of debt, security or pursuant
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to rated entity, Disclosure from rated entity.
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and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
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Artem Frolov
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
JOURNALISTS: 44 20 7772 5456
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Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
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