Eminent Default Rating (EDR) of the OJSC "Azerenergy" tied to the rating of Azerbaijan

The long-term issuer default rating of "Azerenergy"  is set at «BBB-». The forecast - "stable", short-term foreign currency IDR - «F3». This is reflected in the report of the international rating agency Fitch Ratings. In February the same forecast gave experts  of Standard & Poor`s.

Experts say that 90% of the Company's debt is taken under the state guarantees, and in general, the ratings "Azerenergy" are tied to the sovereign rating of the Government of Azerbaijan - the sole shareholder structure, which reflects the strong legal, operational and strategic ties with the state of the consequences. Thus, the February devaluation of the manat (minus 34%) also weakened the creditworthiness of the Company due to the currency mismatch between debt and revenue, as well as limited use of insurance guarantees to reduce the currency risk. Late last year, nearly 80% of the debt was denominated in foreign currency, mostly in euros, US dollars and Japanese yen, while almost all of the revenue is denominated in local currency.

Experts point out that the OJSC is  selling assets in the electricity distribution sector after the government's decision on the transfer of the business to another state company - "Azerishyg" united "Bakyelektrikshebeke" and 6 regional organizations in February this year. After the completion of the sale of assets in the segment of distribution of "Azerenergy" will remain a major player in the domestic energy market with a monopoly in the segment of generation and transmission products distributor. In this regard, the Agency considers the impact of these changes as the uncertainty for standalone company, but neutral for its IDR, which is linked to the sovereign rating.

At the same time, Fitch expects that operational cash flow "Azerenergy" will be reduced by an average of about 125 million AZN in the years 2015-18 (in 2011-14 - 230 million  AZN.) "Free cash flow is likely to remain negative for the rating horizon because of the significant capital investment plans of $ 2.6 billion manats in 2015-2018 (excluding distribution networks.) However, most of the investment program may be canceled, and it may be granted public funding.

Positive rating actions could cause the improvement of the fiscal position of the country, stable economic diversification, supported by reforms aimed at improving the quality of governance and transparency.

At the same time, Fitch views the liquidity of  Azerenergy as a weak and dependent on the preservation of significant state support. At the end of 2014 funds in the amount of 50 million  AZN were not sufficient to cover short-term debt of $ 298 million manat. Short-term debt includes long-term part of the loan from the Asian Development Bank in the amount of 312 million manat, which was not received dispensation from the covenant. Approximately 76% of short-term debt has a guarantee from the state, and another 8% were granted by the Ministry of Finance, which smooth out the liquidity risk.

"We expect that  large-scale investment program of "Azerenergy", is caused by a negative free cash flow will be largely financed by the new, including private capital, partially free up cash flow from operations to payments on debt maturing.  Short-term debt included

Structure "Azerenergy"  does not show any significant peaks  on maturity within the rating horizon at annual planned volume of repayments on the average about 240 million  AZN in 2015-2018 years. However, given the significant capital investment will require government support to balance the future free cash flows, which are expected to remain negative over the medium term," noted  Fitch. --17D-