Moody's: Downgrade of Azerbaijan is credit negative for SOCAR

The downgrade is credit negative primarily because of the strong linkages between the sovereign and SOCAR as a wholly-owned

state company. This action has no immediate impact on SOCAR's ratings.

As a 100% state-owned entity, Moody's determines SOCAR's corporate family rating by applying its Joint Default Analysis and methodology for government-related issuers (GRIs). The company's Ba1 CFR reflects (1) a baseline credit assessment (BCA) of ba3; (2) very high dependence; and (3) high support. This assessment also takes into account the Azerbaijan government's Ba1 rating.

Moody's had already placed SOCAR's Ba1 rating on review for downgrade on 22 January 2016, reflecting the potential weakening in credit metrics due to oil prices, which have fallen substantially in the past few weeks and have reached nominal levels not seen in more than a decade.

In 2016, Moody's expects that SOCAR's credit metrics will weaken further as a result of the lower oil price environment, which could put the company's BCA under pressure. Oil prices fell to about $30/ barrel (bbl) in January 2016. 

As part of its ongoing assessment of energy markets, the rating agency sharply reduced its oil price assumptions on 21 January 2016 in light of continuing oversupply in the global oil markets and ongoing tepid demand growth. Moody's does not expect oil prices to shift significantly in 2016 from their early 2016 levels, which touched multi-year lows in January, but forecasts that Brent crude, the international benchmark, will average $33/bbl for 2016.