Strategic Gas Trunk Pipe Exposed to Risks
24 May, 2012
Strategic Gas Trunk Pipe Exposed to Risks

The much coveted North-South gas trunk pipeline is under USD 250 million Eurobonds loan to raise funds for construction Namakhvani 450 megawatt hydro cascade. Some experts question relevance of the Eurobond allocation deal as non-transparent and risky for gas pipe.

The sagging international financial market trend did not hamper the state owned JSC Georgian Oil and Gas Corporation (GOGC), owning North-South gas trunk pipeline [running from Russia to Armenia through Georgia] as its key assets, to allocate the 5-year USD

250 million Eurobonds for 7.1% of yield at London Stock Exchange (LSE) on May 16, 2012. The yield rate was fixed at 7. 50-7.75% initially, but as demand for Eurobonds exceeded expectation by more than 4-fold the yield dropped to 7.125%.
This USD 250 million will be invested in the upcoming 450 MW Namakhvani Hydro Power Plant (HPP) Cascade project including three HPPs construction with an estimated average annual generation of 1600 GWh and investment costs of USD 800 million. Namakhvani is a subsidiary company to GOGC.
“This is a great success of Georgian economy, “Nika Gilauri, Prime Minister of Georgia, said in the interview with Financial Times after the transaction was through. Part of Georgian experts agree to find the 7.1% of yield rate quite successful against the backdrop of sluggish international market and coming second crisis tide in eurozone. But some find the venture quite risky for its non-transparent sides.
Levan Surguladze, Head of investment bank Caucasus Financial Service (CFS), thinks the GOGC Eurobond deal was successful for around 7% yield is a good achievement today.
“There was a window opened at global financial market at the moment and they used this chance obviously, 7.5-7.1% is an excellent result,” he said.
Lia Eliava, an economic analyst, thinks the yield figure is quite high in fact for good Eurobond deals are concluded at 2-3% for stable economies, and 7% is fixed for less trustful countries like Georgia and GOGC with no obvious financial plans backing the Eurobond emission and from instable country could not get more.
The point is that no financial sheets of GOGC are available at the moment except that company charter capital amounts to GEL 478 325 300 that is divided into 23 916 265 ordinary shares with GEL 20 nominal value per share. Neither did the company implemented any PR campaign to make Georgian publicity aware how reasonably the attracted Eurobonds would have been spent. Only after the Eurobonds deal was allocated GOGC stated in its official release that the attracted money would be invested in Namakhvani cascade, the project questioned by Georgian environmentalists quite ardently for exposed risks.
Ditrikh Muller, a financial market analyst with Georgian Investment Group, fears that the absence of clear economic argumentation of the Eurobond emission poses risks to the trunk pipeline that has a geopolitical importance to the entire region and is coveted by the Kremlin that gets a controlling lever in the region if  this pipe is added to its map.
Privatization of this pipeline has been intermittently popping on the screen as soon as Georgian government needed money under familiar argument that the soviet-time trunk pipeline was obsolete and government had no money to repair it.
Kremlin has long been chasing after this trunk pipe proposing even USD 250 million in 2005-2006 for it and  Georgian government seemed prone to hand over the assets but White House interference blocked the deal: the US allotted about USD 49 million to Georgia [via Millennium Challenge Corporation project] on energy infrastructure rehabilitation project and dissolved the deal. In summer of 2010 the issue of privatization came in again when the gas pipe was removed from the list of strategic objects that cannot be divested and Gilauri did not rule out placement of its 10-15% shares at LSE.  
“Only 10-15% of it can be divested via LSE as the Primer stated, and only in about 2-3 years,” Aleko Khetaguri, Energy Minister of Georgia, said to Georgian Journal in summer of 2010.
Government really planned IPO of GOGC and Georgian Railway in 2010 but delayed for sagging market till their recovery. But Georgian authority could not wait too long in the election year with striped off state budget and decided to raise money through Eurobonds allocation instead of IPO.
As a consequence 100% of the pipe is burdened by the USD 250 million loan at the moment while nobody cared to explain beforehand how this loan would be paid off in 5 years by company financial data of which are confidential as yet.
According to GOGC spokesperson, they keep all financial data closed at the moment for the JP Morgan and Goldman Sachs handling the Eurobond transaction asked to keep all information confidential till the offering process is over. 
“We’ll disclose all details as soon as the offering is through,” Tamar Shoshiashvili, GOGC Spokesperson, told GJ.
Giorgi Loladze, Head of Georgian Stock Exchange, agrees that things can be confidential till the transaction at stock exchange is over for company may change up its mind in the last moment and say no but he eluded commenting how the state companies should behave.
Muller assures confidentiality is OK when it comes to the OTC [over-the-counter] trade but trades at open stock exchange require disclosure of all financial data beforehand and good PR campaign months ahead the trade especially for state companies as Georgian Railway did in past fall. He fears the mistakes of the first Georgian sovereign Eurobonds can be repeated when the first USD 500 million Georgian sovereign bonds emission when funds raised through this loan were designed to be invested in energy projects but were put in the state treasury and two special non-budgetary funds and evaporated ultimately as nobody can trail down where they actually had gone.
“The economic reasonability of GOGC Eurobond issue should be released before the deal to avoid the mistake of sovereign Eurobonds,” he said.
Muller fears that loading assets by loans in order to make it bankrupt and divest ultimately is a probated method in developing countries including Georgia and to make sure that the strategic pipeline is not exposed to such risks GOGC should present clear calculation how it will pay around USD 17.5 million as annual yield while Eurobond maturity expires and then clear the total loan amounting to USD 250 million. 
“Do you doubt that GOGC will be able to cover this debt?” Marika Valishvili, Deputy Energy Minister, asked GJ. “Incomes of this company enable to pay off everything.”
She could not name even average annual income of GOGC however but explained that money will be raised through Namakhvani HPP too as the project will be implemented gradually: the first HPP will be built in 3 years, after 6-motnh period another one will come on, and they will be put into exploitation and generating money gradually to insure completion of the third HPP and success of the cascade eventually.
Namakhvani was supposed to be launched by consortium of Turkey - Korean companies in the second half of 2011 and completed in 6 years. However the deal failed as 18-month period expired in February of 2012 since memorandum with the investors was signed but sides did not reach an agreement. Energy ministry has already announced another call for investors and about 40 companies expressed their interest, but no actual memorandum is concluded with any of them as of yet.
Valishvili says this USD 250 million been raised through the GOGC Eurobonds makes about 30% of USD 800 million projected investments to Namakhvani that enables  the state to attract more finances from international institutions [who require at least 30% of co-financing] and implement Namakhvani project even if investors did not appear.
Non-transparent sides of the deal makes Eliava thinks the fund - raising is to fill the state budget for elections this year that is the reason government jumped on decisions and placed GOGC Eurobonds without disclosing economic grounds beforehand.


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