Georgian investors crave for Georgian Railway Eurobonds
11 November, 2010
Georgian investors crave for Georgian Railway Eurobonds

Eurobonds of Georgian Railway LLC successfully traded at London Stock Exchange attracted attention of US investors recently. Numbers of US investment funds are supposed to acquire the bonds via secondary market soon. Georgian financial market analysts thumb up the deal although they regret that the questioned Eurobonds are not put at Georgian Stock Exchange that might give a serious impetus to the sluggish Georgian capital market development.
BG Capital, a corporate broker and market-maker of Georgian Railway LLC, got through with

the four-day road show held starting October 25-28, 2010 in New York, Boston and Chicago and hopes to attract American investment soon.


The road-show aimed to provide 20 leading US investment funds including Templeton Asset Management, Morgan Stanley Asset Management, Fidelity Investments, Eaton Vance, and Citadel with full information on USD 250 million worth Eurobonds issued by Georgian railway in this past July. Moreover, the event envisaged meeting with the current owners of the questioned bonds.
Eurobonds issued by the state-owned Georgian Railway(GR), a monopolist company donating about GEL 100 thousand each year in the state budget, enjoyed a big success at London Stock Exchange (LSE) although were allocated for 10% of interest rate due to lowered country rating of Georgia affected by August war of 2008 and financial crisis.


However the country rating was raised by all rating agencies to the pre-war data in this fall laying ground to more success of GR’s Eurobonds. As an aftermath the interest rate fixed for GR’s Eurobonds was cut down to 7.9% and they were put on the list of the most demanded bonds within the space of developed bond markets.


As BG Capital informed Georgian Journal, they have already traded by about USD 50 million worth Eurobonds starting their allocation date and the interest did not diminish toward the state-owned enterprise’s bonds and although credit terms worsened [reduction of interest rate] during the last two weeks the initial trade value and profit of the questioned bonds are detained. 
“The profit reduced from 10% to 7.9% and it happened when European investors alone were allowed to the trade and their number was somewhat restricted. Now the demand of US investors will be added,” Giorgi Gagnidze, Financial Director of Georgian Railway LLC, said.
US investors are supposed to acquire GR bonds via secondary market [as they could not participate in the trade of Eurobonds] BG Capital believes however neither the volume nor the date of the secondary market allocation is known as of yet.
Georgian financial market players and analysts approve the GR bonds transaction though wonder and regret that they are not traded at Georgian Stock Exchange (GSE). They believe there would be a big run on GR bonds in Georgia where the single investment tool is banking deposit as the capital market is underdeveloped.


“All bond emitter companies put their bonds at local market first of all and only then allocate them at international stock exchanges,” Ditrikh Muller, one of the founders of Georgian Investment Group, a broker company operating at GSE, said. “Reputable companies like Georgian Railway can give an impetus to sluggish local capital market and GSE, how otherwise GSE is supposed to develop? Volume of deposits exceeded GEL 4.6 billion by the latest data because people have no other tool to invest their money more profitably and all of big depositors were supposed to buy GR bonds and I cannot understand why they did not put their bonds at GSE. To my information interest rate fixed for stocks of Bank of Georgia [that allocated its bonds at GSE initially] at LSE are even higher than at GSE. If GR needs money what makes it difference to them who will buy their bonds if the interest rate will be equal and may be even lower at GSE?”


According to Tina Kipiani, Director of BG Capital, the reason GR bonds are not put at GSE is the capacity of volumes demanded by foreign investors, restriction at GSE for foreign investors, as well as high political risk of Georgia due to which custodian financial institutions [that has the legal responsibility for a customer’s securities] prohibit foreign investment funds to trade at GSE.
“Local investors cannot provide with as capacious volume of demands as foreign investment funds, there are not investment funds operating at Georgian market actually only banks are supposed to ask for bonds,” Kipiani told Georgian Journal. “Besides GR allocated GEL 25 million worth bonds at GSE in December of 2010 prior the Eurobonds’ allocation at LSE and banks acquired them. Moreover, custodians restrict foreign investment funds to participate at GSE trade as political risk of Georgia is still estimated high and they prefer to trade by Georgian bonds at international stock exchages.”
Levan Surguladze, Head of Caucasus Financial Service (CFS), Georgian-based investment bank, argues the country risk is estimated equally at GSE and foreign stock exchanges as they are assessed by international rating agencies. Moreover he presumes that the GR bonds allocation at GSE was rather a loan to Bank of Georgia as the latter purchased the entire volume of bonds. He agrees however that local investors cannot provide with as big volumes of demand as foreign investment funds but asserts that allocation of bonds of big and profitable companies like GR at local capital market is essential for they act as a locomotive and can revive the situation at local capital market and GSE alike.
“Besides allocation of bonds at local market makes transaction procedures more transparent that enables to fix better price at international stock exchanges later,” Surguladze elaborated. 
Muller advises to streamline GSE rules so as to enable foreign companies to trade there on the  one hand, and on the other hand to enable local investors to invest in profitable bonds like GR that will boost Georgian economic development  rather than let foreign companies to enjoy high profit via Georgian bonds and bolster their economies.

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