Azerbaijan

Fitch Assigns Southern Gas Corridor’s Notes ‘BB+ (EXP)’ Expected Rating

Fitch Ratings-Moscow/London-17 March 2016: Fitch Ratings has assigned CJSC Southern Gas Corridor’s (SGC) senior unsecured Eurobonds a ‘BB+(EXP)’ expected foreign currency long-term rating.

The bond’s final rating is contingent on the receipt of final documentation conforming to that held and confirmation of the final amount and tenor of the notes.

The notes will be issued by SGC, which is ultimately owned by Azerbaijan (BB+/Negative). The notes will be explicitly guaranteed by the Ministry of Finance acting on behalf of the Republic of Azerbaijan and rank pari passu with all other obligations of SGC.

KEY RATING DRIVERS

The rating reflects Fitch’s expectation that Azerbaijan will honour the unconditional, unsubordinated and irrevocable guarantee provided to noteholders in a full and timely manner. As a result, Fitch views the notes as credit-linked to the sovereign. The notes’ rating is aligned with the rating of Azerbaijan and factors in SGC’s state ownership, close financial integration with the government and strategic importance of its projects to country’s development.

According to the deed of guarantee, Azerbaijan guarantees the noteholders the “due and punctual payment of all sums” originally scheduled to be due and payable by SGC under the notes. Noteholders can enforce their claims directly against Azerbaijan without being required to institute legal actions or proceedings against SGC first. The guarantee is governed by English law and would rank pari passu with all other unsecured external sovereign debt.

SGC acts as a financial arm and asset holding agent in gas export sector of Azerbaijan with stakes in Shah Deniz gas-condensate field and construction of gas pipelines to southern Europe via Georgia and Turkey. SGC received these assets from the State Oil Company of Azerbaijan (SOCAR, BB+/Negative), which along with its international partners, i.e. BP, Statoil, Petronas, BOTAS among others, retains operational management of the projects.

In Fitch’s view, projects under SGC’s development carry strategic importance for Azerbaijan’s long-term macroeconomic stability, while the most of the gas is already contracted until 2045 by buyers from the EU and Turkey. Azerbaijan is highly dependent on oil and gas with hydrocarbons accounting for 95% of exported goods, 50% of budget revenues and 40% of GDP in 2015.

Fitch considers Azerbaijan’s control over SGC’s operations as strong. The entity is 100% owned by the state through a 51% stake held by the Ministry of Economy of the Republic of Azerbaijan and a 49% stake held by SOCAR. The supervisory board is composed of high ranking government officials and regularly approves SGC’s major financial and operational decisions.

Fitch views government support previously provided to SGC as a supportive rating factor. The entity’s funding stemmed from a combination of debt and equity originated from the state; USD2.5bn bonds issued in favour of State Oil Fund of Azerbaijan at below market rates (LIBOR + 1%) and capital injections, which totalled USD1.7bn as of end-February 2016.

According to management’s forecast, SGC’s net financial needs for operations and capex will be close to USD8.4bn in 2016-2019. Fitch expects SGC to tap debt capital markets for funding in the medium term, while bonds and loans could be supplemented by state capital injections should offered market terms be unacceptable.

RATING SENSITIVITIES
The rating of the senior unsecured notes is equalised with that of Azerbaijan. Accordingly, any changes in the sovereign rating will be reflected in the notes’ rating. Furthermore, any sign of Azerbaijan’s intention to non-honour or revoke the guarantee would be rating negative.