New Eurobond emission, new puzzles
14 April, 2011
New Eurobond emission, new puzzles

Georgia took its second sovereign Eurobond emission of USD 500 million and 10-year maturity to refinance similar volume of its existing five-year emission allocated in 2008 at London Stock Exchange. Part of economic analysts approves the deal as an inevitable remedy to pay off the first Eurobond emission that expires in 2013. Some analysts argue that Georgia should stop practicing sovereign loan emission with the purpose of covering another loan.


On April 7, 2011, Georgia successfully priced a new 10-year USD

500 million sovereign Eurobonds transaction and in parallel redeemed USD 417 million of its existing USD 500 million 7.50% bond due by 2013 through“any and all” cash tender. Ultimately 83% of investors replaced the old 5-year Eurobonds by the new 10-year benchmark offering 7.125% of interest rate.
A carefully implemented 3-days multi-team roadshow strategy, covering San Francisco, Los Angeles, Boston, New York, London, Frankfurt, Munich, Geneva, and Zurich, highlighted Georgia’s strong credit momentum and attracted numerous new institutional investors, Ministry of Finances of Georgia (MOF), informed Georgian Journal.
According to MOF, the achieved pricing level is also materially inside of other similarly rated sovereign issuance from the region. S&P’s and Fitch’s decisions to upgrade Georgia’s credit rating outlooks to ‘positive’ from ‘negative’ in March helped highlight the country’s positive credit momentum ahead of the deal announcement.
Governmental standpoint is that the newly taken sovereign Eurobond emission will not be spent on financing the state budgetary expenses unlike the first emission of 2008 that financed budgetary expenses targeted at handling with the war-inflicted results after Russia routed Georgia in August of 2008. 
This emission was a subject of severe criticism for Georgia had a budgetary surplus in 2008 and no economic analyst recommended to take a sovereign loan without grounded economic reasons and calculations for government did not provide with detailed description where the loan was supposed to go. And it vanished in consequence. No transparent accounts of the questioned loan expenses were presented to publicity up to date and economic analysts find suspicious both spending and economic benefit of the USD 500 million worth loan requiring roughly USD 36 million as an interest pay per year. Economic analysts warned then that Georgia could not pay off the loan without taking another loan.
But government assures it can easily cover the loan even at the instant from its free deposits. Kakha Baindurashvili, Minster of Finances of Georgia, during his meeting with Georgian businessmen in this past February reported that government has about GEL 1 billion [about USD 625 million] in the state treasury but government takes a new loan for raising awareness of the country at international market and keeping a new benchmark that opens up new and better credit opportunities to Georgian banks and business at international market.
Levan Kalandadze, an economic analyst, believes this kind of argumentation is a mug’s game. “It’s nonsense to take a loan for fixing a new benchmark that allegedly easies life to commercial sector. All investors know that you take a loan not for financing economic projects but for covering another loan.  It would have made greater effect on international investors if Georgia would have covered the USD 500 million worth loan this year since there is sufficient money in the state treasury, and took a new loan for fianancing economic activity rather than cover loans by loans,” he explained to GJ.
|Kalandadze believes Georgia must stop this vicious practice of converge loans by new loans that may lead to irretrievable results.
“I greet Eurobonds emission if it would be targeted on financing economic projects that could boost economic development of the country, but I hate this trend to take a new loan to pay off old obligations. Ok, assume we redeemed payment of this first USD 500 million emission by 2020 by this new 10-year emission, how can we cover this in 2020 by another loan? It may never end. Plus we have to pay about USD 36 million per year as an interest per year that makes USD 360 million by 2020, and for what?” He asked GJ.
Besides Kalandadze fears the law prohibiting spending of the new loan on budgetary expenses can really prevent unreasonable squander.
“Since the money will be accumulated in the state treasury who can outline which is the loan-based and which one is not, nobody will be able to control where the treasury-based money will go in fact,” he said.
Levan Surguladze, Head of Caucasus Financial Service, approves governmental initiative to issue Eurobonds to keep a benchmark at international market and finds the recent transaction quite successful.
“This is excellent that we have two benchmarks now at international market. Georgia had to take this new loan for the benchmark sake even if it really was able to pay off the old loan… Besides loan terms are very good: we took the 10-year loan for 7.1% while the earlier 5-year loan fixes 7.5%. Longer loans are riskier and given for higher interest rate usually. This means the interests was high and the country had better assessment than expected,” he said.

 

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