S&P assigns CJSC Azerbaijan Railways 'BB+' Corporate Credit Rating

Standard & Poor's Ratings Services said that it assigned its 'BB+' corporate credit rating to 100% state-owned national rail transport operator Azerbaijan Railways Closed JSC (Azerbaijan Railways), the agency's press release says. The outlook is stable.

"The rating on Azerbaijan Railways is based on our assessment of the company's stand-alone credit profile of 'bb-', as well as on our opinion that there is a "very high" likelihood that the government of the Republic of Azerbaijan (BBB-/Stable/A-3) would provide timely and sufficient extraordinary government support to Azerbaijan Railways in the event of financial distress," the press release says.

In accordance with our criteria for government-related entities, we base our view of a "very high" likelihood of extraordinary government support on our assessment of Azerbaijan Railways':

- "Very important" role for the Azerbaijani government, in light of Azerbaijan Railways' monopoly position as the owner and manager of the national rail infrastructure and rolling stock. In our view, Azerbaijan Railways plays a key role in implementing Azerbaijan's infrastructure development plan, which we understand is one of the government's highest priorities.

- "Very strong" link with the government of Azerbaijan, given the state's 100% ownership of Azerbaijan Railways; the government's role in appointing Azerbaijan Railways' senior management; and our understanding that Azerbaijan Railways will not be privatized in the medium term.

"The 'bb-' SACP reflects our assessment of Azerbaijan Railways' business risk profile as "fair" and its financial risk profile as "aggressive"," the Service's experts believe.

The "fair" business risk profile is supported by Azerbaijan Railways' status as the monopoly operator of rail infrastructure in the country and its track record of good profitability. These strengths are offset by Azerbaijan Railways' aging infrastructure and rolling stock that is in need of development, and by competition from road traffic and oil pipelines for freight volumes. According to the experts, the company, together with the Azerbaijani economy, is heavily exposed to changes in the global demand for oil.

"The "aggressive" financial risk profile reflects Azerbaijan Railways' low leverage measures. These are offset by significant negative free operating cash flows due to high capital expenditure (capex). In addition, there is no track record of the Azerbaijani government providing the company with material levels of cash to fund capex because this was not previously required," the press release says.

The "aggressive" financial risk profile also reflects the underdeveloped nature of the Azerbaijani banking system.

The stable outlook reflects our view that Azerbaijan Railways will finance its capex with the help of government funding. It also reflects that Azerbaijan Railways is likely to grow its revenues and profits thanks to its ability to increase tariffs as well as freight volumes. Under our base case, the company is likely to maintain adjusted debt to EBITDA of less than 2x in the medium term, which we view as commensurate with the current rating. Lastly, the stable outlook mirrors that on the Republic of Azerbaijan.

"We could take a negative rating action if Azerbaijan Railways' adjusted debt to EBITDA increased to more than 2x. This could occur due to a change in policy such that Azerbaijan Railways funded its significant capex program using external funds rather than funds from the Azerbaijani government. We could also take a negative rating action if ongoing liquidity support from the Azerbaijani government was not as timely as we currently anticipate, or if we took a negative rating action on the Republic of Azerbaijan," the press release says.

A positive rating action is only likely if we take a similar action on the Republic of Azerbaijan. Azerbaijan Railways' SACP would have to improve to 'bb+' before it triggered a positive rating action on the corporate credit rating, the press release says.


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