Fitch affirms Azerenerji JSC at 'BBB-'; outlook stable

Fitch Ratings has affirmed Azerenerji JSC's Long-term Issuer Default Rating (IDR) at 'BBB-' with a Stable Outlook and Short-term foreign currency IDR at 'F3'.

The affirmation reflects Azerenerji's continued strong links with the Republic of Azerbaijan (BBB-/Stable) and state guarantees for about 90% of the company's outstanding debt.

Azerenerji's ratings continue to be aligned with those of its sole shareholder, the Republic of Azerbaijan, reflecting the strong legal, operational and strategic ties between the company and the state. The rating alignment reflects state guarantees for the majority of Azerenerji's outstanding debt (about 90% at end-2014), the company's strategic importance to the Azerbaijani economy and strong operational links, including tariff and capex approval by the government, as well as track record of direct tangible state support.

The recent 34% Azerbaijan manat devaluation weakens Azerenerji's standalone credit profile due to the currency mismatch between the company's debt and revenues and limited use of hedging to reduce exchange-rate risk exposure. At end-2014, almost 80% of the company's outstanding debt was denominated in foreign currencies, mainly in euros, dollars and Japanese yen versus almost all local-currency denominated revenue. We expect devaluation will increase Azerenerji's gross leverage to above 10x at end-2015, other things being equal.

Azerenerji's ratings are supported by strong links with the state through guarantees of substantial portions of the company's debt and therefore are unlikely to change as a result of its worsening financial profile unless there is unremedied liquidity squeeze.