DEBUT MOVE

The third day of the third month of winter 2012 can rightly be called historic for the State Oil Company of Azerbaijan (SOCAR) - on this day it successfully completed the placement of the debut issue of its own Eurobonds in London. The company spent almost 5 years to reach this day - SOCAR first announced its intention to issue Eurobonds in 2007. Initially, the placement of bonds worth $ 300-500 million was planned for late 2008 - early 2009, but then it was postponed several times, including because of the global financial crisis.

However, the company finally did decide to make this rather risky move amid concerns about the ongoing crisis in European economies. And the decision proved correct - the first issue has already interested 290 investors with the total amount of orders reaching no less no more $ 4.6 billion.

First attempt successful

To begin with, we should note that the total amount of the Eurobonds issued was $ 500 million with a yield of 5.45 per cent per annum. The maturity date of the primary Eurobonds is set for 9 February 2017. The Eurobonds are issued on the basis of Regulation S of the US Securities Act. The general managers of the Eurobonds are the RBS (Royal Bank of Scotland), Citibank, and Deutsche Bank, the joint managers are Nomura International Plc. and Soci?t? G?n?rale S.A., the representative of the investors is Deutsche Trustee Company Limited, while the main agent for payments and transfers is Deutsche Bank AG (London Branch). The list, as you can see, is rather solid.

It must be noted that in January, the leading rating agencies Moody's Investors Service and Fitch Ratings awarded the first Eurobonds of SOCAR preliminary rating - Ba1 and the senior unsecured foreign currency rating of BBB-(exp) respectively. The ratings were awarded in a timely fashion because the State Oil Company launched a road-show on 30 January, that is to say negotiations with investors, and such an assessment was an important stimulus for their activity. We should add that later Fitch Ratings assigned the SOCAR bonds the final senior unsecured foreign currency rating BBB-, which corresponds to the long-term Issuer Default Rating (IDR) of the company (BBB-, "stable" outlook.)

SOCAR ratings take into account the presence of government support, as the company is 100 per cent state-owned and represents the state's interests in the strategically important oil and gas industry, which is essential for the economy, since 43 per cent of GDP and 73 per cent of budget revenues in 2012 are to be provided by hydrocarbons. Therefore, even though the SOCAR bonds were unsecured, they aroused great interest among investors.

Most investors (46 per cent), among whom the first issue was placed, represent the United Kingdom, 38 per cent - other European countries, 12 per cent - US offshore companies and 4 per cent - Asia. As a result of the placement, 63 per cent of the Eurobonds were purchased by stock holders, 16 per cent - banks, 11 per cent - insurance companies and pension funds, and 10 per cent - hedge funds.

"The acquisition of SOCAR Eurobonds by a large group of investors from various regions of the world and the fact that the sum of investors' applications is 9 times higher than the amount of emissions confirm the high interest of foreign investors in Azerbaijan. This is the result of the strengthening of Azerbaijan's economy and its increasing role in the global economy," SOCAR said in a statement on the debut issue.

Money or image?

Thus, the debut issue was a success, but at the same time, the question may arise: why did the State Oil Company take this step now in the midst of the crisis in the economies of Europe and the United States and in an unfavourable situation on the world stock markets? What is it - a way to raise funds for the implementation of large projects, or, rather, an opportunity for boosting the global image of the company?

To begin with, both before and after the first issue, it was stated that, according to plans, the proceeds from the bonds will be partially used to finance the company's capital investment and for general corporate purposes.

This is understandable: if you consider that SOCAR intends to pursue its expansion strategy with an intensive investment programme of $ 5.2 billion manats until 2014 (excluding obligations under production sharing agreements), the implementation of this programme and the planned construction of oil refineries on the premises of Petkim for approximately $ 4.4 billion may require significant external financing.

In addition, the company is highly successfully entering markets in Georgia, Turkey, Ukraine, Romania and Switzerland, where it implements major projects connected with the construction of oil refineries, the construction and acquisition of petrol stations, etc. Another focus of SOCAR in the near future will be the markets of Central Asia. In particular, an agreement has already been reached to start the construction of an oil refinery in Kyrgyzstan with a capacity of 2 million tons per year.

In parallel, the company has big plans within the country. Currently, SOCAR has undertaken to independently develop oil and gas fields in Azerbaijan, which, of course, also requires a lot of money. There are ambitious plans to create the region's largest complex for processing oil, gas and petrochemicals in the country, which will be one of the major projects envisaged in the development plan of the State Oil Company. It is projected that the construction of the new complex could require investments of $ 13-15 billion.

All this coupled, of course, confirms the need to raise additional funds that can be used as a result of the placement of securities and use of loans. The only question is that this should happen on favourable terms. It is this task, in its second part (loans), that the Eurobonds will help resolve.

Here it should be noted that so far, the company has had no problems in attracting loans largely due to the high ratings assigned to it by three internationally recognized credit rating agencies, whose opinion is taken into account by major funds. Suffice it to note that the agreement with BNP Paribas S.A. on a loan of $ 750 million, signed in 2006 without government guarantees or other collateral, has already allowed SOCAR to independently raise funds from global capital markets at reasonable rates in the future.

However, the placement of the bonds will become a signal for credit institutions. That is to say the successful placement of securities will significantly reduce the cost of borrowings for SOCAR, which now cost it at the rate of libor + 2.5 per cent on average, and the company is trying not to cross this threshold. Previously, the average lending rate stood at libor + 5 per cent.

In other words, the Eurobonds, namely the fact that their debut issue took place during the crisis in Europe, will significantly improve the image of the State Oil Company. The crisis will be over, but getting high ratings, especially at a time of global instability when international agencies are downgrading or even recalling the ratings of countries and their subjects, will boost the reputation of SOCAR as a stable company.

In addition, the placement of the bonds will allow the State Oil Company to determine the level of the fair value of loans for the company. This activity displayed by SOCAR at a time of instability on world markets indicates that the company is not only a name, but also is worth the money it attracts.

In a word, no matter what angle the step taken by the State Oil Company is seen from, it is clear that it has taken the right decision that will yield considerable dividends in the future - both financial and image-related. The debut move will be followed by victory.