SOCAR Incurs Huge Debt, Raises Questions

SOCAR Incurs Huge Debt, Raises Questions

CESD experts question the decision of SOCAR to incur long-term debt by issuing Eurobonds

Azeri state energy firm SOCAR plans to issue Eurobonds worth $1 billion for refinancing its existing debt and funding its upstream and downstream operations, a SOCAR official and Moody’s said on March 02, 2013. SOCAR President said the company carried out the first issue of Eurobonds in the amount of $500m in February 2012.  “The profitability on these Eurobonds  dropped from 5.4% to 2.6% which proves the great demand for them and the trust to SOCAR of international financial structures. We are planning to raise loans for major projects which is why we will continue the issue of Eurobonds”, the SOCAR president said.

He  also said that SOCAR is working on issue of corporate obligations on the internal market of Azerbaijan.  “This will revive the equity market of the country. In addition, we are selecting the priority projects which will be financed at the cost of domestic corporate bonds”, he said.

Eurobonds are divided between investors of England (46%), Europe (38%), offshores of the United States (12%) and Asia (4%). As a result, 63% of Eurobonds were bought by fund participants, 16% by banks, 11% by insurance companies and pension funds and 10% by hedge funds.

The bonds were issued in accordance with the US Securities Act’s Regulation S  (a “safe harbor” that defines when an offering of securities is deemed to be executed in another country and therefore not be subject to the registration requirement under section 5 of the 1933 Act). Citigroup, Deutsche Bank, and The Royal Bank of Scotland were the underwriters, and Nomura and Societe Generale Corporate & Investment Banking are the paying agents.

According to experts of the Center for Economic and Social Development (CESD), SOCAR’s decision to issue Eurobonds will lead to a faster increase in aggregate debt.

In fact, SOCAR’s need for the loan raises strong doubts in this period of high oil prices in the world market, and the company’s high gross income from sales.  The State Oil Company’s reallocation of existing resources would have been more efficient rather than incurring further debt.

The interest rate of the company’s bond placement is 5.45%. In comparison, the State Oil Fund of Azerbaijan (SOFAZ) directs its funds to purchase Eurobonds in America and the Eurozone with an interest rate of 1%.  Practically, this means that one state company lends to foreign companies at an interest rate of 1% per year and, on the other hand, another state company borrows from foreign investors at 5,45 %.  In both of the cases winning parties are foreign investors.

SOFAZ emphasizes that it chooses to invest in bonds that are generally viewed as safe investments while SOCAR, on the other hand, claims that its issuance of bonds reduces risks.

In fact, SOFAZ could have obtained a more favorable interest rate by lending money to SOCAR, which also would have been beneficial to SOCAR at the same time because an even lower interest rate could have been negotiated.

According to experts, SOFAZ’s investment policy and SOCAR’s debt issuance is an indicator of nonexistent coordination between the state agencies. SOCAR’s decision to issue Eurobonds, without any apparent coordination with other state agencies, means a significant increase in long-term debt and substantial annual payments at an unnecessarily high interest rate.

It bears emphasizing that because SOCAR is a state company, the Azerbaijani government guarantees these debts. Accordingly, in the future, if SOCAR defaults, the state will be forced to pay for it. In 2008, SOCAR received 600 million AZN ($ 770 million) from the State budget to increase its authorized capital. Additionally, in June of 2009 the Central Bank provided SOCAR with a seven-year term loan of 750 million US dollars with an interest rate of 3%. As a result, the company’s long-term debt obligations at the beginning of 2011 were 2 billion 62.844 million AZN, 2 billion in trade payables. 445.829 million. AZN. At the same time, credit debts have increased by 17,1%.

CESD experts believe that the sum acquired from the issued assets as well as the sum of annual benefits cannot be determined with exact certainty. Before deciding to issue Eurobonds, SOCAR would have been better served by devising a coordinated financial strategy and detailing sound reasons for the need to incur further debt.

CESD, 2013

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