Fitch affirms Azerbaijan's power utility Azereneji at BB+ despite mounting debt

By bne IntelliNews December 8, 2016

Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) of Azerbaijan's utility Azerenerji at BB+ with a negative outlook, saying the action was justified by the company's strong links with the state. The affirmation takes place despite a significant increase in the company's debt, the majority of which however is guaranteed by the state, Fitch said on December 6.

State-owned Azerenerji is the largest power generation company in Azerbaijan, and also controls one of the largest distribution networks. Fitch downgraded the utility's rating by one notch in March to reflect the government's rating.

Some 91% of the utility's AZN2.4bn in debt at end-2015 was guaranteed by the state. “Given Azerenerji's unsustainable standalone profile, we expect it to receive state guarantees for any new, currently unplanned, debt. State guarantees for Azerenerji's debt are included in the government's debt and the government has sufficient resource to meet its obligations to Azerenerji and its creditors,” Fitch says.

Baku has been suffering as a result of a decline in oil and gas revenues in recent years, which have forced the government to cut back on public spending. Furthermore, it prompted the depreciation of the currency, which lost 50% of its value against the dollar in 2015 and has continued to weaken in 2016. Since Azerenerji's debt is largely denominated in foreign currencies, this prompted a 66% increase in its debt levels in 2015.

While Azerenergji received some AZN970mn (€513.2mn) in equity injections from the state in 2009-2015, and has agreed to continue with injections of $172mn and €204mn to assist the company in paying its foreign-currency denominated debt in 2016-2025. However, it is unclear whether the government would continue to finance investments in the power sector as it did before the oil crisis.

The ratings agency expects electricity generation to mirror the country's GDP growth, which it forecasts at -2.3% to 1.8% between 2016-2019. Electricity tariffs are expected to increase by 3%-11.5% as a result of inflation during this period. 

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