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Georgian Railway - FY16 update

26 June, 2017

GR released disappointing FY16 audited results. On the back of a steep decline in freight traffic volumes, the top line decreased 26.6% y/y, from an already low base, to US$ 185.9mn. Operating expenses, which are mostly GEL-denominated, declined 9.9% y/y to US$ 153.7mn, as GEL depreciated by 4.1% against the US$. Factoring in the US$ 61.0mn credit line and US$ 34.0mn one-off, non-cash income from transfer of land to the government, per the Eurobond prospectus, FY16 net debt-to-adjusted EBITDA came in at 3.1x, below the Eurobond covenant of 3.5x. Excluding the one-off income, adjusted EBITDA decreased 40.1% y/y to US$ 85.2mn. The modernization project is due to be finished in 2019, while the bypass project remains under review.

In FY16, freight traffic and logistic service revenues declined 29.8% y/y to US$ 146.0mn and 10.1% y/y to US$ 22.2mn, respectively. GR reclassified the revenue generated by its freight forwarding subsidiaries under logistic service, a new revenue line. Freight car rental revenue decreased 44.9% y/y to US$ 5.9mn, while passenger traffic revenue was up 11.5% y/y to US$ 7.6mn.

FY16 operating expenses declined 9.9% y/y to 153.7mn, with electricity, consumables and maintenance expense decreasing the most (down 25.6% y/y to US$ 20.0mn).

FY16 adjusted EBITDA was propped up at US$ 119.0mn (down 16.3% y/y) by the US$ 34.0mn one-off, non-cash income from transfer of land to the government. Excluding the one-off income, adjusted EBITDA dropped 40.1% y/y to US$ 85.2mn, which would imply a contraction of the adjusted EBITDA margin to 45.8% (56.2% in FY15). The weakening of GEL against US$ in FY16 triggered a large, albeit non-cash, FX loss of US$ 47.4mn, accounted for as a finance cost and weighing on the bottom line. In line with the newly enacted corporate income tax law, effective January 1, 2017, GR converted its deferred tax liability into a one-time gain of US$ 18.8mn, which led to the recognition of a significant income tax benefit (US$ 16.4mn) in FY16. As a result, FY16 net income came in at US$ 27.5mn.

FY16 operating cash decreased 40.0% y/y to US$ 79.2mn, while capital spending accelerated 22.4% y/y to US$ 84.6mn, largely due to modernization project expenditures. In FY16, dividends have not been declared, while the dividend payable of US$ 1.6mn from FY15, per the government’s decision, was set off with the US$ 0.7mn investment in the construction of the Batumi Passenger Station and the remaining part with the acquisition of long-term assets for a state-controlled entity.

FY16 debt was at US$ 536.0mn, while the cash balance was at US$ 105.0mn. Per the Eurobond prospectus, a US$ 61.0mn credit line has been added to cash and cash equivalents and one-off income (US$ 34.0mn) from transfer of land to the government was included in adjusted EBITDA when calculating the net debt-to-adjusted EBITDA ratio, which came in at 3.1x, below the Eurobond covenant of 3.5x.

In Jan-17, Fitch downgraded GR from BB- to B+ (Outlook Stable) after placing it on Rating Watch Negative in Sep-16. GR has also published its 2016 Management Discussion and Analysis. A full report with our detailed projections will follow shortly.

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Georgia's Tourism Sector - Tourism Market Watch | May 2017

9 June, 2017

The number of visitors at Georgia’s mountain resorts reached a historical high during the 2016-2017 season. Mountain Resorts Development Company (MRDC), the managing entity of Georgian winter resorts, has released a summary of the season. Thanks to favorable weather conditions, the season opened early in December in Gudauri and by the end of the year, all winter resorts were receiving guests. The early start provided a welcome boost, as the total number of visitors to Georgia’s winter resorts exceeded 400,000 (+37.0% y/y) during the season.

Gudauri remains the most popular ski resort, hosting more than 276,000 visitors during the season, up 37.1% y/y. The number of visitors to Gudauri has increased more than three-fold from almost 89,000 visitors during the 2011-2012 season. The resort’s proximity to the Russian border makes it especially attractive for Russian skiers. Currently Gudauri features 10 ski lifts, with combined tracks of approximately 70km, and visitors can enjoy skiing, snowboarding, paragliding, and heli-skiing. MRDC and the Ministry of Regional Development and Infrastructure are currently working on a 7.5km Kobi-Gudauri ski lift, which will connect Gudauri with Kazbegi. The project is expected to be finished by end-2018 and will be the longest lift in the Caucasus. Other projects include an artificial lake for snowmaking purposes, which would prolong the winter season in Gudauri.

Major development is in the works for Bakuriani, which hosted over 115,000 visitors in the 2016-2017 season, up 24.6% y/y. The coming years will see Olympic infrastructure development at the resort, with a biathlon track, ski jumping hills, and an ice hockey rink in the pipeline. Furthermore, Georgian Reconstruction and Development Company (GRDC), in a PPP with the Georgian government, plans to invest GEL 100mn in the development of the Kokhta-Mitarbi resort, adjacent to Bakuriani. The resort will be developed according to a master plan prepared by the industry leader, Geode. 

The number of international arrivals was up 5.7% y/y to 0.55mn in May 2017. Out of the top four source markets, there was strong growth from Armenia (+8.9% y/y), Azerbaijan (+8.5% y/y) and Russia (+16.8% y/y). A 24.4% y/y decrease in arrivals from Turkey, in line with the downward trend of the last few months, was the main drag on growth in the total number of visitors. Arrivals from the EU were up 13.0% y/y to over 28,000 visitors, while Ukraine also posted solid growth (+20.2% y/y).

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Regional Fixed Income Market Watch | May 2017

9 June, 2017


  • GDP growth in the USA in 1Q17 was revised up from an annualized 0.7% y/y to an annualized 1.2% y/y. The Russian economy expanded 0.5% y/y in 1Q17, while GDP was up 2.4% y/y in Ukraine and 3.4% y/y in Kazakhstan.
  • Inflation in the USA retreated to 2.2% y/y in April 2017 after a 2.4% y/y price increase in the previous month. Inflation in the Eurozone was down from 1.9% y/y in April 2017 to 1.4% y/y in May 2017.
  • In May 2017, the Central Bank policy rate was lowered in Ukraine (from 13.00% to 12.50%) and Russia (from 9.75% to 9.25%) and increased in Georgia (from 6.75% to 7.00%).
  • According to short-term rapid estimates, economic growth in April 2017 came in at 7.1% y/y in Kazakhstan, 3.4% y/y in Armenia, 3.1% y/y in Russia, and 2.1% y/y in Georgia. 4M17 GDP was up 0.5% y/y in Belarus and down 1.2% y/y in Azerbaijan.
  • In April 2017, inflation was flat at 14.4% y/y in Azerbaijan, while it accelerated in Turkey (to 11.9% y/y), Georgia (to 6.1% y/y), and Armenia (to 1.2% y/y). Inflation slowed in Ukraine (to 12.2% y/y), Kazakhstan (to 7.5% y/y), Belarus (to 6.3% y/y), and Russia (to 4.1% y/y) in April 2017.
  • JSC Bank of Georgia, BGEO Group PLC’s banking business subsidiary, successfully placed an inaugural GEL 500mn offering of 11.00% notes due June 2020. J.P. Morgan and Renaissance Capital acted as joint bookrunners, while Galt & Taggart acted as a co-manager. The notes are listed on the Irish Stock Exchange. The issuance was the first international local currency bond offering from the wider CIS region (excluding Russia) in the past ten years and represents a landmark transaction for Georgia.

Please see the full report for detailed coverage of the fixed income markets of Georgia, Armenia, Azerbaijan, Belarus, Kazakhstan, and Ukraine.

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Georgia's Energy Sector - Electricity Market Watch | April 2017

6 June, 2017

Electricity deficit in 2017 bridged by imports rather than TPPs. Electricity imports in 4M17 have already exceeded 2016 total imports by 85.1% and 2017 planned imports by 7.6%. 886.7 GWh of electricity (+138.2% y/y) was imported in 4M17, with Azerbaijan being the main source of imports (62.7% of total) and the rest coming from Russia (24.2%) and Armenia (13.1%). Relative prices of TPP-generated electricity and imports were the main reason behind choosing imports over TPPs to satisfy high demand (5.3% higher than planned) and make up for low HPP generation (11.0% lower than planned).

Price volatility on the Turkish market led to a reduction in the number of companies willing to export from Georgia to Turkey, leaving unallocated capacity of 4MW out of the 250MW allowed export capacity (ATC) in May 2017. Private companies with priority access to the Meskheti transmission line connecting Georgia and Turkey will be the main exporters to Turkey in 2017. Armenia has also become an attractive market for Georgian companies. Among the exporters to Armenia, besides the privately owned GIEC, is ESCO. In exchange for the imported electricity during 4M17 (116.3GWh), ESCO is exporting electricity to Armenia in May and June.

IMF has declared PPAs for power plants as a fiscal risk for Georgia in its country report issued in April 2017. IMF recommends refraining from initiating any PPA agreements until the institutional framework is in place. Taking into consideration the existing fall-winter period power deficit, partial PPAs currently under negotiation, with cumulative installed capacity of up to 500MW, are permitted to proceed, as long as the guaranteed purchase period is limited to eight months and the purchase price to USc 6.0/kWh.

Domestic consumption increased 7.9% y/y in April 2017 and 9.1% y/y in 4M17. Consumption of distribution companies increased 7.1% y/y in April: consumption was up 8.5% y/y by Telasi, 6.2% y/y by Energo-Pro, and 8.1% y/y by Kakheti Energy Distribution. The Abkhazian region’s electricity usage was up 13.7% y/y and accounted for 18.4% of domestic consumption. 

Growth in domestic consumption was met mostly through imported electricity. Total electricity supply from domestic sources was down 6.6% y/y, while imports increased almost six-fold. Three quarters (74.9%) of domestic consumption needs were met by hydro generation; the rest was satisfied by thermal (8.9%) and imported (15.2%) electricity, while the newly built wind power plant accounted for 1.0% of total electricity supply.

Wholesale market prices in Georgia were 16.0% above the Turkish market clearing price in April 2017. The Georgian wholesale price in April 2017 was flat at USc 4.7/kWh (+0.7% y/y), mainly due to the low import price and a change in the balancing electricity purchase price methodology. Starting April 1, the price paid by the market operator (ESCO) to deregulated HPPs for balancing energy supply was lowered from the highest regulated TPP price (14.234 tetri/kWh) to the highest regulated HPP price (9.4 tetri/kWh). In April 2017 the share of such electricity in total balancing energy market was 9.1%, while imports were the leading component (52.3%). Overall, electricity traded through the market operator in April 2017 reached 280.0 GWh, 29.1% of total electricity supplied to the grid, with the rest traded through bilateral contracts.

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