Fitch has assigned a dollar bonds SOCAR expected senior unsecured rating of "BBB-(EXP)"

Fitch Ratings has assigned the planned issue dollar-denominated senior unsecured bonds of the State Oil Company of Azerbaijan Republic (hereinafter - "SOCAR") expected senior unsecured foreign currency rating to "BBB-(EXP)".

The final rating is contingent upon receipt of final documentation, which must correspond to a large extent previously provided information, and after receiving the information about the volume, coupon rates and maturities of the bonds. It is expected that the proceeds of the bonds will be used in part to finance the Company's capital expenditure and other general corporate purposes.

SOCAR plans to issue bonds at the parent company. Although SOCAR owns 100% in all the major subsidiaries of generating cash for bonds does not provide a direct guarantee from the operating subsidiaries of SOCAR. The prospectus contains covenants restricting the distribution of net profits, selling key assets, consolidation, sale of assets in the form of software and provision of cross-default.

Despite the fact that over half of the debt on June 30, 2012 was at the level of subsidiaries, Fitch is currently considering senior unsecured creditors at the group level as structurally subordinated, given the low level of income from subsidiaries. For example, the principal debtor of subsidiaries is SOCAR Turkey Energy AS, which accounted for about 31% of the total outstanding debt at June 30, 2012, but this structure had a negative EBIT figure at minus 56 mln in 1H 2012

In addition, Fitch does not see strong prospects for recoveries for holders of debt of subsidiaries in Azerbaijan and does not expect the recoveries at the level of foreign subsidiaries will be significant enough to affect other senior unsecured creditors in the liquidation scenario. Therefore, Fitch Assigns expected senior unsecured ratings on par with the IDR SOCAR. Fitch may revise its approach to the rating of the notes if the current structure of operating profit and debt change so that the holders of debentures of subsidiaries will have priority over the senior unsecured creditors at the group level.

SOCAR's ratings take into account the availability of state support and are aligned with the sovereign rating of Azerbaijan ("BBB-" / forecast "Stable"). The company is 100 percent state-owned, is the state's interests in the strategically important oil and gas industry, and continues to receive contributions from the state capital, for example, 190 million manat in 2011, and in 2012 was approved the next payment in SOCAR at 200 AZN, but it has not yet been conducted.

Fitch views the business and financial results of SOCAR on a standalone basis as the relevant rating category 'BB'. This is mainly due to adequate credit metrics of the company in comparison with Russian and international peers: operating EBITDA margin of 27% and an adjusted leverage on funds from operations (FFO) to 1,2 x in 2011

SOCAR has relatively limited scope for production of oil and gas in 2011 (excluding shares in other companies) to 263 thousand barrels of oil equivalent per day. Fitch expects that in the future production growth is due mainly to an increase in production by major production sharing agreements with SOCAR. As SOCAR operates mature oil and gas fields, its production costs are high compared to the comparable Russian companies.

Fitch views positively the fact that in 2011, SOCAR signed an agreement on the second phase of Shah Deniz gas to Turkey for the sale and its transit to European markets, the launch of which the company is currently planning for 2017, which should reinforce the implementation of the project.

The ratings incorporate an intensive program of SOCAR investment of AZN 5.3 bn in 2012-2015, including obligations under production sharing agreements. The group also plans to build a refinery in Turkey STAR production capacity of 10 million tons of oil, which should be completed in 2017

Forecast to Fitch, FFO adjusted leverage to remain below 2x in 2012, but will exceed 2x in 2013 Leverage is still comfortable for the current rating level.

In the case of rating action on the sovereign issuer may impact on the ratings of SOCAR. Evidence of weakening public support would be negative for the ratings to SOCAR. Increase the level of state support, such as government guarantees for much of the company's debt, coupled with improved sovereign ratings would be a positive point for the company's ratings.

Aggressive investment program, and / or acquisition, leading to a significant and prolonged deterioration in credit metrics, would be negative for the ratings to SOCAR.

Cash held by SOCAR in the amount of AZN 1,006 mln on June 30, 2012 were sufficient to cover the debt with short maturities of 656 million manat at that date. A significant proportion of funds SOCAR, including short-term deposits, located in the state-owned International Bank of Azerbaijan ("BB" / forecast "Stable").

Fitch notes that SOCAR is required to pay or refinance the equivalent of 727 million dollars in 2013, then annual production maturity not exceeding the equivalent of $ 400 million by 2017

74% debt of SOCAR as of June 30, 2012 was denominated in U.S. dollars, including bonds worth $ 500 million maturing in 2017. - 15D -