AK&M Agency affirms the credit rating of SOCAR Polymer

The 'A+' rating indicates that SOCAR Polymer LLC qualifies as a highly creditworthy borrower. The risk of a failure to meet obligations in time is insignificant. The rating assignment is based on the Credit Rating Methodology for Specialized Project Financing Entities (rev. February 16, 2015, including the amendments and additions approved by the Methodology Committee on October 12, 2015 and February 16, 2016). The rating was assigned on the national scale in the context of the rated Company's borrowings from a Russian bank.

SOCAR Polymer LLC is a typical project financing entity (SPV) established for implementing a technologically specific project. SOCAR Polymer LLC is responsible for the construction and subsequent operation of a polypropylene / HD polyethylene production facility in the industrial zone of Sumqayit city. The total CAPEX under the project is set equal to USD 770 million, the total amount of obligations borrowed for project implementation is USD 489 million. The production facility will primarily run on ethylene, propylene and hydrogen supplied by the State Oil Company of Azerbaijan Republic (SOCAR).

The SOCAR Polymer LLC project is currently at the investment stage, with construction of production capacities in progress. Under the project, SOCAR Polymer LLC will complete the construction stage in 2018 and start the manufacture in the first half of 2018.

The credit rating of SOCAR Polymer LLC is supported by high profitability and financial stability of the project, a comfortable balance of SOCAR Polymer LLC's main cash flows, temporary preferential tax treatment for SOCAR Polymer LLC as well as the State Oil Company of Azerbaijan Republic's involvement and its equity participation in SOCAR Polymer LLC.

The project for the construction and operation of a polypropylene / HD polyethylene production facility and value added products based on them promises high returns. Total net profit for the whole lifecycle of the project is estimated at USD 3,769 million, net present value at USD 481 million.

The minimum internal rate of return under the project is 17.9%, which means a payback period of six years, which is fairly good for a project where the production equipment is expected to have a service life of over 20 years.

One of the major positive rating arguments for SOCAR Polymer LLC is a comfortable balance of the cash flows generated by the project, the excess of income over expenses and the high financial stability of the project. Net cash flow accumulated during the life cycle of the project is projected at almost USD 3.6 billion. In the period from 2015 to the project closeout, the financial stability ratio stays near 1 and never goes below 0.93.

The good balance of financial flows and high financial stability of SOCAR Polymer LLC reflects the Company's ample capabilities for unproblematic loan debt servicing. The average annual debt coverage ratio under the project is 7.4. The minimum interest coverage ratio reduction to 1.4 in 2018 will be followed by a vigorous and steady increase to 24.2 in 2024.

With this in mind, the Company's debt burden will be on a favorable trend. From an extremely high level in 2018, the Company's debt ratio will go down to 2.7 in 2019, to 1.7 in 2020 and continue to decrease later.

The 7-year preferential tax period (until 2020) granted to SOCAR Polymer LLC for project implementation purposes also contributes essentially to the rating. Of special importance is that SOCAR Polymer LLC is exempt from the property tax and profits tax throughout this period. The preferential tax treatment provides additional financial opportunities for the successful project implementation.

In AK&M Rating Agency's view, one of the positive rating drivers underlying, to a large extent, the stability and success of the project implementation is the involvement of SOCAR: its equity stake in SOCAR Polymer LLC is 51%. Besides, the state-owned company will be the principal supplier of raw materials under the project. SOCAR's trading companies will also undertake sales of all SOCAR Polymer LLC products. Finally, the project provides for further additional contributions to the rated Company's authorized capital in the course of implementation so as to bridge possible financing gaps.

At the same time, the difficulty of forecasting demand and prices of SOCAR Polymer LLC products on a long-term horizon (especially amidst a continuing global economic crisis), the fact that the production facilities are not commissioned yet and a heavy debt burden on the rated Company at the initial stage of the project are putting pressure on the credit rating of SOCAR Polymer LLC.

The project operation will start in 2018 and end in 2037. Amidst continuing economic turbulence, forecasting the demand and prices of SOCAR Polymer LLC products on a long-term horizon is rather problematic. This generates certain risks in relation to the current revenue and net profit forecast and therefore, makes the credit rating subject to change.

The production capacities of SOCAR Polymer LLC are not commissioned yet. The project implementation is at an early construction stage. At the end of 2015, SOCAR Polymer's incomplete construction, according to the audited financial statements, amounted to USD 141 million (7% below the initial plan reflected in the financial model). However, AK&M Rating Agency does not believe the deviation poses a critical risk for the project. The amount of SOCAR Polymer's incomplete construction projects should double at least in 2016. All the risks related to the construction stage of the project constrain the credit rating of SOCAR Polymer LLC.

Another negative signal is a high debt burden at the initial project stage. Until 2018, the amount of debt on credits and loans will be approximately twice above the equity capital of SOCAR Polymer LLC. In the first year of the project operation, net debt to EBITDA ratio will reach 7.4.

In the forthcoming 12-month period, construction of production facilities will remain the core activity of SOCAR Polymer LLC. In AK&M Rating Agency's view, no totally new risks capable to influence the rating outlook will appear. The situation will fundamentally change only in the second quarter of 2018 when the production facilities will be commissioned and new factors (related to the production process and the marketing of products) capable to influence the outlook on the rating will be at play. The above-mentioned motivates Agency to affirm the outlook on the credit rating of SOCAR Polymer LLC at 'stable'.