Georgian Railway Pays Dividends from Eurobond Debt
27 September, 2012
Georgian Railway Pays Dividends from Eurobond Debt

Entirely state-owned Georgian Railway (GR) having successfully placed USD 500 million of Eurobonds this summer plans to pay out USD 202 of the Eurobond emission in dividends. As the best world practice shows, dividends are paid from profit not the debt; experts link this dividend pay-out of GR from the debt with the pre-election campaign financing.

The emission of the USD 500 million Eurobonds helped GR to broaden its investors’ base and increase liquidity, BG Capital the wholly-owned investment arm of

Bank of Georgia (BOG), informed in its Georgian weekly market watch on September 7, 2012. On July 5, 2012, GR placed USD 500 million 10-year Eurobond with 7.75% coupon to pay back its first and more expensive 5-year USD 250 million Eurobonds issued in 2010 [with 9.8% coupon] as well as pay out USD 202 million in dividends to government-the sole stakeholder of GR.

Out of this USD 202 million government plans to invest USD 139 million in Tbilisi Bypass Project evaluated at EUR 300 million totally and aimed on construction of a new bypass to re-route rail traffic outside Tbilisi centre. The remainder USD 63 million will be paid in cash that most probably go on financing of the underway pre-election campaign of ruling party that desperately needs money to compete the billionaire Bidzina Ivanishvili, Georgian political tycoon and leader of oppositionist Georgian Dream coalition, some experts suggest.

The conjecture is based on the best world practice that pays dividends from the profit not the debt.

“As much as I remember this is the first ever dividends pay-out of GR [to government] but what makes me wary is that GR pays dividends from the debt not the profit as reasonable businesses do. Very seldom companies pay dividends from debts too but only in case if they have problems and want to attract more private stakeholders to keep the company floating, but in this case we speak of the fully state owned company and I see no reason to pay dividends from the debt that reached a critical benchmark to GR I think,” Ditrikh Muller, a financial market analyst and co-founder of broker Georgian Investment Group said.

He approves the said Eurobond emission for its apparent profitable terms that GR managed to pay back  89% of the first 2015-due USD 250 million of Eurobond [issued by GR in 2010]  at 111.25% of face value but requires more reasoning to load GR that is of crucial strategic importance to the country by loans.

GR is a strategic asset of Georgia claiming to be a transit hub in the Transcaucasia region. It is an integrated part of the historical Silk Road transit corridor linking oil-rich Asian countries with the powerful European markets. The upcoming Baku-Akhalkalaki-Karsi railway [directly connecting Azerbaijan, Georgia and Turkey] scheduled to be completed by 2012 is expected to increase GR’s transit capacity many folds translating into bigger profits accordingly.

GR is of crucial importance to Armenia and Azerbaijan been at political tension due to territorial conflicts. GR is the sole operational rail artery to Armenia cut out of Azerbaijan and Turkey for political reasons.  Therefore when Georgian government decided to make Initial Public Offering (IPO) of 25% of GR in fall and spring of 2011 and 2012 respectively, both Azeri and Armenian sides became anxious bidders. Armenia felt especially uneasy that Azerbaijan been a strategic partner to Georgia thanks to shared transit corridor and mutual energy projects might overtake GR’s share and block the railway artery to Armenia. So Armenia expressed its interest to acquire the stake completely to insure its security. The third key bidder is presumed to be Russia that already owns Armenian railway and is very much interested to get at hands GR too. The reason is clear: GR together with Azeri railway is key competitor to Russian railway in the region, besides it gives a clue to the Kremlin to control political situation in the South Caucasus.

However, Georgian government delayed both IPOs expected to attract around USD 200-250 million out of sagging market fears. However, the sagging market did not hamper to place USD 500 million Eurobonds of GR in a month after its IPO scheduled by May 24, 2012 was revoked on the eve of the trade. Cancelation was imputed to allegations that Ivanishvili planned to bid.

Georgian experts do not doubt that GR is able to pay off debt but they require clearer and reasonable argumentation why the debt is taken for if the situation aggravates and GR fails to clear liabilities note-holders may require divesture of GR assets that will bring an irretrievable impact on Georgia’s transit capacity.

“Conditions are much better than for the first USD 250 million emissions. But the point is railway is a strategic object and you should take loans only if there is real need for money, and the need should be backed by well-calculations. If these calculations do exist why not,” Irakli Lekvinadze, an economic expert, said. He also finds pay-out of dividends from the debt strange.

“Generally they should be paid from the profit, that makes me worry,” he said.

Unlike the much trumpeted road-show and happy outcry staged before the GR’s first USD 250 million Eurobond issued in 2010 the latter Eurobond deal was implemented behind scenes. Public learnt of the deal when it was already through. Muller doubts this non-transparency and profitable terms of the said deal that seems too good against the backdrop of the financial market crisis globe over bespeaks there was no trade at all and the state [that deadly needed money for elections as it rushed on IPOs and Eurobonds during the financial market crisis] has secured one note-holder, presumably Russian, beforehand.

“I approve the deal as GR needed money for its infrastructure development and managed to attract resources by replacing the old expensive debt by cheaper one. But the fact that the deal was made non-transparently and so well-positioned very shortly after the IPO was delayed due to dwindling market fears that did not recover up to day, makes me as a broker doubt that government had its secured investor perhaps only one ready to pay money and since the IPO failed they came up with this Eurobond immediately. And since neither Azeri nor Armenian side made any outcry I think new investor attracted to GR is Russia that is acceptable to both Azerbaijan and Armenia and that has its big interest in GR,” Muller elaborated.

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