State-owned GOGC placed a debut 5-year US$ 250mn Eurobond at 7.125% YTM in May 2012. Active interest from investors points to their conviction in both the Georgian macroeconomic story and the company’s prospects. Staunch government support and a solid cash flow generating profile leave us comfortable with GOGC’s ability to respect Eurobond covenants and service the debt.
Continued active investor interest in Georgia
Georgian issuers are benefiting from active investor interest due to the country’s prospects for continued economic growth and its low debt profile. At 34%, Georgia has one of the lowest general government debt-to-GDP levels among Eastern European peers, while the economy expanded 7% in 2011. In 2011, leading rating agencies upgraded the Georgian sovereign from B+ to BB-. Moreover, we view priced-in risk premiums on the back of Europe’s debt crisis as excessive and believe Georgian exposure remains attractive.
Staunch state support
GOGC is the largest gas supplier to the domestic market, contributing around 1% of Georgia’s GDP. Fully state-owned, the company enjoys staunch support from the government in the form of considerations of financial needs in setting dividend policy, equity contributions, and more. We believe the government will continue supporting GOGC’s efforts to maintain an adequate liquidity profile.
Stable, solid cash flow
Visibility for GOGC’s revenues is high owing to long-term gas supply and consumption contracts and fixed prices, and we see revenues growing at a 10% CAGR over 2012-17, mainly driven by the construction of new hydro plants. Gas sales (78% of 2011 revenues) are set to remain the main cash flow driver until the new hydropower production assets are brought online in 2015. Cash flow should further benefit from additional pipeline capacities in 2018. Our model shows GOGC comfortably adhering to all Eurobond covenants.
Hydropower to boost profitability
Proceeds from the Eurobond placement are earmarked for the construction of two new hydropower plants with 200 MW of installed capacity. Once fully operational, the high-margin assets will spur cash flow and add up to US$ 81mn in revenues (34% of total) in 2016, according to our estimates. High electricity prices in Turkey, projected strong demand, geographic location, and low costs should allow GOGC to export electricity and generate high margins.
