Dissolved EBRD Loan Affected Georgian Eurobonds
01 December, 2011

Some Georgian market analysts think the dissolved loan deal between Georgian Railway and the European Bank for Reconstruction and Development affected Georgia’s image and securities at international stock exchanges that deprives the country of a chance to get cheaper financial resources at international markets.

Nika Gilauri, Prime Minister of Georgia, during his speech at the Parliament on November 25, 2011 declared that investors’ trust in Georgia is much higher than in East European countries as “Georgian sovereign Eurobonds are traded much

better than those of East European countries’ Eurobonds.”

However, government delays trading by minor shares of Georgian national companies at international stock exchanges this year. Early this year government planned to put shares of state energy companies [including Telasi, Tbilisi electricity distribution network, 75% of which is owned by Russian-based RAO UES And 24% - by Georgian state, as well as Georgian Oil and Gas Corporation that includes assets of the North-South pipeline sought by Russia for a long period] at international stock exchanges and get profit.

The underway economic crisis in EU and unfavorable situation at international stock exchanges is the reason of the delayed transaction, Gilauri stated on November 18, 2011 at the governmental meeting.

Ditrich Muller, a market analyst at Georgian Investment Group, believes the reason that made the government change the plans is the recent revocation of EUR 100 million loan the European Bank for Reconstruction and Development (EBRD) was supposed to give to Georgian Railway LLC (GR), the 100% state owned enterprise that started trading its corporate Eurobonds in summer of 2010 at London Stock Exchange (LSE).

The EBRD loan was earmarked to finance approximately EUR 300 million-worth Tbilisi Railway Bypass project aimed to re-route rail traffic beyond Tbilisi centre. However, implementation of resettlement process in full compliance with the EBRD’s social and environment requirements was a strong precondition for the loan.  However, GR committed outrageous violation of the rights of more than 800 landowners through ministration of government, police and court. Victims appealed to the EBRD that implemented an independent audit this summer that led to number of questions and recommendations with GR . Sides did not disclose details of these questions and recommendations. Although property right violation was not solved, and on November 7, GR made an official statement that it can afford financing Tbilisi Bypass project without the EBRD loan.

Muller believes it was the EBRD that cut funding to GR in fact as the European bank did not want to partake in the project lagging behind social responsibilities acknowledged by the EBRD. And although neither the EBRD nor the GR affiliates the dissolved loan deal with the resettlement project Muller thinks international investors are well aware of the fact.

It is an open secret that anticipation frequently outlines the securities’ price at stock exchanges till the official statement is made by companies. As a matter of fact price of GR’s corporate as well as Georgian sovereign Eurobonds depreciated by approximately 12 and 8 percentage points respectively in June-October, till GR and the EBRD made official statements on cutting funds early in November.

The price of GR’s corporate Eurobonds that were in rise since past December hit its peak of 112.487 on June 8 and start falling till its lowest 98.494 margin on October 4, and start slow recovering with slight fluctuations. It is traded around 101.672 now.

The price on Georgian sovereign Eurobonds followed similar track. It started falling in August and depreciated from 104.630 fixed on August 4 as the highest to its lowest fixed at 95.884 by October 5, the next day when GR Eurobond price fixed its lowest rate. Georgian sovereign Eurobonds started a slow recovering and are traded around 103.305with slight fluctuations at the moment.

Shares of the Bank of Georgia (BOG) enlisted at the LSE was at rise since past December, it started depreciation in April and fell by about 5% by September 23. It is traded around 99.813 now.  Akaki Gelashvili, an analyst with BG Capital, an investment company that handled GR, BOG and Georgian sovereign Eurobonds transactions, thinks the depreciation of Georgian securities in this past August-September is a result of global market trends that was sluggish in this period.

Muller believes the reason is the dissolved loan deal between the state-owned enterprise and the EBRD.

“When such a reputable bank as the EBRD cuts funding to the country it affects the investment image and the recent trade trends of Georgian securities bespeak of this. As a result Georgia is supposed to get financial resources at international market much expensive in future then it used before. And I believe this is the reason Georgian government delayed the deal of putting shares of national energy companies at international stock exchanges,” - he said.

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