Is SOCAR investment effecient?

Is SOCAR investment effecient?

Most of the funds received by Azerbaijan’s state energy firm Socar from the placement of Eurobonds in the amount of $500 million were spent to pay the assets in Switzerland, purchased from Exxon Mobil, a Socar official told the Baku-based Trend news agency. Socar signed an agreement with Exxon Mobil to acquire its Swiss branch, Esso Schweiz GmbH, in November 2011. The company will operate under the brand name Esso within 12 months after a change of ownership.

“Some $200 million of proceeds from the placement of Eurobonds was sent to acquire the assets in Switzerland,” the Socar representative said. The company will take over several Esso businesses in Switzerland, including a fuel wholesaler and aviation fuel supply businesses at Geneva and Zurich airports. It will own a retail network consisting of 170 filling stations, gas filling plant in Wangen bei Olten, and the supply company that controls joint ventures managing terminals and pipelines.

Part of the funds from the placement of Eurobonds, in the amount of $133 million, is intended for the purchase of 10 percent of the state-owned share of Turkish petrochemical complex Petkim, which is co-owned by Socar.

Previously Socar Turkey Enerji, the Turkish division of the Azerbaijani state energy firm, started construction of a new oil refinery in Turkey in order to meet Petkim’s needs for raw materials. Petkim Petrokimya Holding manufactures plastic packaging, fabric, PVC, detergents, and is the only Turkish producer of such products, 25 percent of which is exported.

The rest of the proceeds from the Eurobond issue – $166 million – focused on external debt of the company, the Socar official said. The $133 million were used to repay the loan borrowed from BNP Paribas and $33 million to cover the loan provided by the Turkish Yapi Kredi Bank. Socar’s loan portfolio amounted to $1.5 billion as of January 1, 2012.

Socar has successfully completed the placement of a debut Eurobond issue in London on February 2. The Eurobonds were of great interest among investors. The total volume of orders submitted by 290 investors totaled $4.6 billion.

The Eurobonds totaling $500 million issued by Socar have a yield of 5.45 percent per year. The maturity date of the primary Eurobonds is February 9, 2017. Socar plans to make an additional issue of Eurobonds in the amount of $250 million in the near future. Excess of demand over supply 10 times was observed during the placement of Socar Eurobonds. In this regard, the consultants suggested that Socar make an additional placement on the same terms and in a short period of time.

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.

SOCAR’s debt will stand at 4.6 billion US dollars  Let us recall that the Company  assets were estimated 15, 7 billion AZN  (about 20 billion USD) on January 1, 2011. According to the State Statistics Committee, the value of SOCAR’s assets increased 8, 3 billion  AZN ( about 10.5 billion USD) from 2010 to 2011 (a 3,7% increase).  At the same time the following changes have taken place: an increase in current assets  is 1,016 AZN (a 29,3% increase), an increase in investments in joint ventures 248,870 million AZN (growth 2.4 times), and a decrease in deposits of 399,011 million AZN (decrease 2.2 times). In 2010 SOCAR’s total capital increased 160,095 million AZN (a 1,5% increase).  Furthermore, other indicators recorded are as follows: authorised capital increased 632,732 million AZN (a 1,6% increase), and retained profit decreased 6 billon 691,732 million (a decrease 1,3%).

According to official reports, SOCAR’s income in 2010 was 5,5 billion AZN (about 7 billion USD), and experts maintain that SOCAR incurring additional debt was not necessary to implement its existing projects. SOCAR’s issuance of Eurobonds that will lead to broad debt cannot be justified from an economic perspective. 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, 2012


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