Fitch Ratings has affirmed Southern Gas Corridor CJSC’s (SGC) senior unsecured Eurobonds’ long-term foreign currency rating at ‘BB+’.
The affirmation reflects Fitch’s unchanged view on SGC’s USD2 billion Eurobonds maturing in 2026 fully guaranteed by the Republic of Azerbaijan (BB+/Stable).
KEY RATING DRIVERS
The rating reflects the unconditional, unsubordinated and irrevocable guarantee of full and timely repayment provided to noteholders by the Azerbaijan government. As a result, Fitch views the notes as equalised with the sovereign Foreign-Currency IDR.
According to the deed of guarantee, Azerbaijan guarantees the noteholders the due and punctual payment of all sums 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. The reserves for the guarantee coverage have been taken into account in Azerbaijan government’s budget for 2018.
According to management’s forecast, SGC’s net financial needs for operations and capex will be close to USD2.2 billion in 2018-2019 taking into account proceeds from the operation of Shah Deniz and South Caucasus Pipeline. Fitch expects SGC to raise loans from development institutions and 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.
SGC’s funding stems from a combination of debt and equity originated from the state; USD2.5 billion bonds issued in favour of State Oil Fund of the Republic of Azerbaijan at below market rates (LIBOR + 1%) and regular capital injections, which totalled USD2.4 billion as of end-2017. In addition, SGC placed sovereign-guaranteed bonds of USD2 billion via two tranches in March 2016 and March 2017.
SGC acts as a financial vehicle and asset holding agent in the gas export sector of Azerbaijan with stakes in the Shah Deniz gas-condensate field and gas pipelines stretching to southern Europe via Georgia and Turkey. The entity is tightly controlled by Azerbaijan, i.e. it ultimately owns 100% in SGC via a 51% stake held by the Ministry of Economy and a 49% stake held by the State Oil Company of Azerbaijan Republic (SOCAR, BB+/Stable). The supervisory board is composed of high ranking government officials and regularly approves SGC’s major financial and operational decisions.
In Fitch’s view, projects under SGC’s development carry strategic importance for Azerbaijan’s long-term macroeconomic stability, as it is highly dependent on hydrocarbons, which accounted for 64% of current account receipts in 2017. According to our estimate, Azerbaijan will gradually shift its reliance on oil to gas as aging oilfields from the Soviet period push the government to develop new revenue sources. In 2017 oil production declined by 6% due to the natural depletion and compliance with the OPEC/non-OPEC production cut deal. Future growth is likely to be driven by stage 2 of Shah Deniz, which the BP-led consortium expects to become operational in late 2018 and produce up to an additional 16 bcma of natural gas and 105 thousand barrels of condensate per day.
The strategic importance of SGC is further strengthened by the cross-border nature of its projects, involved intra-governmental commitments and political support from transit states, the EU and consumers. Most of the gas is already contracted up to 2045 by buyers from the EU and Turkey. In 2017 SGC also secured direct financing of its stakes in the projects from the following international financial institutions: USD0.4 billion from IBRD (part of World Bank group), USD0.6 billion from Asian Infrastructure and Investment Bank, USD1 billion from Asian Development Bank, USD0.5 billion from European Bank for Reconstruction and Development, all of which were fully guaranteed by the Republic of Azerbaijan.
RATING SENSITIVITIES
The rating of the senior unsecured notes is equalised with that of the Republic of Azerbaijan. Accordingly, any changes in the sovereign rating will be reflected in the notes’ rating. Furthermore, any sign of the Republic of Azerbaijan’s intention to non-honour or revoke the guarantee would be rating negative.
