S&P Global Ratings has affirmed the corporate credit rating of Azerbaijan's state-owned oil and gas company Socar at 'BB' with a negative outlook, the ratings agency said on December 14.

The ratings's affirmation comes despite Socar's weakening financial metrics as the agency sees an extremely high likelihood of government support, which underpins the rating at its current level.

S&P assesses Socar 's stand-alone credit profile at 'b+', revised down from 'bb-', due to higher leverage, while viewing Socar's put option on Steas shares of Azerbaijani new manat AZN2bn as debt-like “as we do its long-term advance payment for the deferred sale of stakes in its key strategic projects, Shah Deniz and related pipelines (AZN2.5 billion), to SOCAR's 49%-51% joint venture with the state, Southern Gas Corridor”, the statement reads.

With debt adjusted for the put option and deferred asset sale, S&P expects Socar's adjusted ratio of debt to EBITDA to be about “4x and funds from operations (FFO) to debt to be about 17%-20% in 2016-2018”. The agency expects Socar’s investments to result in negative free operating cash flow (FOCF). However, the state’s commitment to fund a large part of SOCAR's capex on the Shah Deniz project and related pipelines should help limit future debt increases, the agency believes.

That said, the agency will continue to “monitor any potential changes in the government's policy toward its various GREs in the hydrocarbon sector”. If Socar were to default, the agency says it would have severely negative consequences for the sovereign's reputation and access to financing. The government has historically provided loans and equity financing from state-owned banks to Socar. Still, most of Socar's debt does not have any state guarantees, S&P points out.

The negative outlook on Socar mirrors the negative outlook on Azerbaijan. Additional pressure on the rating could stem from a weakening of Socar's connection to the government and of its role in Azerbaijan, S&P adds. The outlook could be revised to stable in case of an upgrade on Azerbaijan. That said, the agency does not see a strong likelihood of a positive rating action in the next year or two.