Baghlan Group FZCO - a vulnerable company

Local diversified company Baghlan Group FZCO, which is the principal owner of Hafiz Mammadov has received a credit rating.

As the credit rating service Standard & Poor's it is assigned a long-term credit rating of "B" rating outlook - "stable."

"We appreciate the business risk profile of Baghlan as" vulnerable "and financial risk profile as" aggressive "- this is the conclusion of experts.

In the past year, adjusted EBITDA (earnings before taxes, depreciation and other interest) of Baghlan was 144 million manats (about 137 million euros).

The company operates in the freight sector, passenger transport, construction, trade equipment and oil and gas (in particular, holds 66.67% equity interest in the company Bahar Energy limited, develops offshore block of fields Bahar and Gum Deniz field in the Caspian Sea).

The negative impact on the rating has Baghlan position as a relatively small company, which depends on large contracts, particularly in the construction of roads for the state of Azeryolservice and freight forwarding (for these services she receives a considerable discount of 50% of CJSC "Azerbaijani Railways" on transportation large volumes of cargo).

For this reason, any changes in the terms of these contracts may greatly affect the earnings or cash flows of Baghlan. The Company is exposed to risks associated with significant fluctuations in working capital (in particular in connection with the project of road construction), which can degrade the performance of cash flow and liquidity, despite the fact that payments to suppliers depend on the dynamics of receivables. In addition, the company launches a new project in the oil and gas sector, which would require large capital expenditures and the implementation of which is associated with certain risks.

According to the authors, Baghlan has a concentrated ownership structure, so it will affect the stability of a change in the position of Hafiz Mammadov in the business or political environment in Azerbaijan. The company also Baghlan subject to risks associated with doing business in Azerbaijan, which is its main activity.

Positive impact on the performance of the company has diversified its activities in different business segments and good profitability in under existing contracts. The business environment in Azerbaijan creates barriers to entry in Baghlan key niche business, but in the future the situation may change - says the analyst team.

As of December 31 last year, the debt level was moderate Baghlan (233 million manat). Under the baseline scenario, the company will stick to its balanced approach to debt management.

Baghlan investments in oil and gas sector comes under the agreement production sharing, which provides for the allocation of capital expenditure between partners and allows you to quickly pay back the investment through increased production. In other segments requires only a relatively small capital expenditures for maintenance.

"Stable" forecast reflects expectations of Standard & Poor's as to what Baghlan will maintain liquidity at a manageable level for the next few years, avoiding significant additional costs for working capital or significant deterioration of basic the conditions of its largest contracts.

Rating may be downgraded in case of liquidity pressure, a significant adverse change in the profitability of the main contract, or in the case of acquisition of major assets funded by debt, which is not foreseen in the baseline scenario.

Possibility of rating in a short and medium term is low due to the small size of the company and the high level of volatility in its business – the international experts believe. - 17D-