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Year: Month: All releases Economy Sectors Companies
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Regional Fixed Income Market Watch | August 2019

20 Sept, 2019

Highlights

  • US real GDP growth revised down to an annualized 2.0% (second estimate) in 2Q19, from an annualized 2.1% (advance estimate). Unemployment rate was 3.7% in August 2019, unchanged since June 2019.
  • In 2Q19, real GDP increased by 1.2% and by 1.4% in the EU19 and the EU28, respectively. In July 2019, unemployment rate was 6.3% and 7.5% in the EU19 and the EU28, respectively.
  • Turkish economy contracted by 1.5% y/y in 2Q19 after falling 2.6% y/y in 1Q19.
  • In July 2019, economic growth was 8.1% y/y in Armenia, 6.1% y/y in Georgia, 5.1% y/y in Kazakhstan and 2.6% y/y in Russia, based on preliminary data. In 1H19, real GDP growth was 2.5% y/y in Azerbaijan and 1.3% y/y in Belarus.
  • Annual inflation in the US was 1.7% in August 2019, down from 1.8% in previous month. Based on the Eurostat flash estimate, annual inflation in EU19 was 1.0% in August 2019, unchanged from the previous month.
  • In August 2019, annual inflation was above the target level in Russia (4.3%), Georgia (4.9%), Belarus (5.7%), Ukraine (8.8%) and Turkey (15.0%); inflation was within the target range in Kazakhstan (5.5%), and below the target in Armenia (0.6%). Annual inflation was 2.4% in Azerbaijan in August 2019.
  • As of 17 September 2019, monetary policy rate increased by 0.25bp to 9.25% in Kazakhstan and by 0.5bp to 7.0% in Georgia, while it was cut by 0.25bp to 5.5% in Armenia, to 7.0% in Russia and to 8.0% in Azerbaijan, by 0.50bp to 16.5% in Ukraine and by 3.25bp to 16.5% in Turkey. The key rate has remained unchanged in Belarus.
  • As of 17 September 2019, Fitch upgraded Ukraine’s rating to B from B- with a positive outlook and Moody’s upgraded Armenia’s rating to Ba3 from B1 with a stable outlook.


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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Regional Fixed Income Market Watch | July 2019

21 Aug, 2019

Highlights

  • US real GDP growth slowed to an annualized 2.1% (advance estimate) in 2Q19, after 3.1% growth in 1Q19. Unemployment rate was 3.7% in July 2019, unchanged from the previous month.
  • EU19 real GDP grew by 1.1% y/y in 2Q19 after 1.2% y/y growth in 1Q19. Unemployment rate in EU19 was 7.5% in June 2019, down from 7.6% in the previous month.
  • In June 2019, economic growth was 5.0% y/y in Georgia, 4.3% y/y in Kazakhstan, 3.4% y/y in Armenia and 1.9% y/y in Russia, based on preliminary data. In 1H19, real GDP growth was 2.4% y/y in Azerbaijan and 0.9% y/y in Belarus.
  • Annual inflation in the US was 1.8% in July 2019, up from 1.6% in previous month. Based on the Eurostat flash estimate, annual inflation in EU19 was 1.1% in July 2019, down from 1.3% in June 2019.
  • In July 2019, annual inflation was above the target level in Georgia (4.6%), Russia (4.6%), Belarus (6.0%), Ukraine (9.1%) and Turkey (16.7%); inflation was within the target range in Kazakhstan (5.4%), and below the target in Armenia (1.7%). Annual inflation was 3.7% in Azerbaijan in July 2019.
  • As of 19 August 2019, monetary policy rate was cut by 0.25bp to 8.25% in Azerbaijan and to 7.25% in Russia, by 0.50bp to 9.5% in Belarus and to 17.0% in Ukraine and by 4.25bp to 19.75% in Turkey. Key rate has remained unchanged in other countries.
  • Fitch reaffirmed Georgia’s rating at BB with a stable outlook and upgraded Russia’s rating to BBB from BBB- with a stable outlook in August 2019.

 

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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Georgian Oil and Gas Corporation - New Highs from 2020

16 Aug, 2019

GOGC released audited FY18 results. Reduced demand on natural gas due to mild winter decreased both, the revenue and expenses of the company. Revenue was down 5.3% y/y to US$ 253.6mn and operating expenses decreased 3.4% y/y to US$ 182.5mn. Notably, less favorable contractual terms for pipeline rentals and one-off costs related to legal fees weighed on profitability in 2018. Therefore, adjusted EBITDA decreased 7.4% y/y to US$ 86.8mn. Importantly, expected growth in gas consumption and related increase in gas purchase costs will temporarily deteriorate profitability metrics in 2019. Significant cash outflows related to the Gardabani 2 construction is another channel effecting negatively the net-debt-to-adjusted EBITDA ratio, which expected to reach 3.1x in 2019, still below Eurobond covenant of 3.75x. From 2020, Gardabani 2 commissioning and availability of increased cheap gas volumes from SCP are seen as major channels supporting significant improvement in GOGC’s profitability. Notably, Fitch upgraded company’s credit rating to BB in March 2019 matching that of Sovereign, backed by GOGC’s solid financial position, diversified cash flow streams and strong monopoly in Georgia’s energy sector.

Mild winter reduced revenue. FY18 revenue was down 5.3% y/y to US$ 253.6mn as gas sales volume reduced due to favorable weather conditions. Gas sales decreased 5.7% y/y in 2018, still remaining largest revenue item (56.3% of the total). Electricity sales made up 32.5% of total revenue and increased 3.6% y/y to US$ 82.5mn. Revenue from rent of pipelines dropped 30.4% y/y to US$ 16.6mn due to revised contractual terms, which are less favorable.

Lower gas purchases reduced operating expenses. Cost of gas, the largest operating expense category (79.4% of the total) was down 7.4% y/y to US$ 145.0mn in 2018. Operating expenses were down 3.4% y/y to US$ 182.5mn, driven by lower gas purchase costs, while one-off costs related to legal fees increased. Low demand limited gas purchase costs, with average prices remaining flat y/y at US$ 95.4/mcm in 2018. These flows resulted in 6.4% y/y reduction in adjusted EBITDA, which came in at US$ 86.8mn in 2018.

Expected gas demand growth to deteriorate profitability in 2019 before significant improvement from 2020. We expect the average gas purchase price to increase 13.0% y/y to US$ 107.9 in 2019 as enhanced SCP’s throughput will be still insufficient to satisfy the growing gas consumption. As a result, 2019 adjusted EBITDA expected to slide to US$ 54.9mn compared to US$ 86.8mn in 2018. The trend is set to reverse from 2020, helped by increased share of cheap gas from SCP and launch of Gardabani 2.

Electricity will make up c. 45% of revenue from 2020. Commissioning of Gardabani 2 from 2020 expected to generate c. US$ 66.0mn in revenue from electricity sales and add c. US$ 26.0mn to 2020 EBITDA. This revenue stream and decreased cost of gas expected to significantly strengthen GOGC’s financial position from 2020. We forecast adjusted EBITDA to rise to US$ 90.1mn and US$ 96.9mn in 2020-21, respectively.

KfW approved US$ 150mn loan for gas storage construction, which is expected to be finalized by 2022-23.

Temporary deterioration of the company’s profitability and credit metrics will push net-debt-to adjusted EBITDA from 1.4x in 2018 to 3.1x in 2019. However, improved financial position from 2020 expected to bring the ratio back to around 1.5x over 2020-21.


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Georgian Railway - Dry cargo set to drive growth | FY18 & 1Q19

24 July, 2019

2018 turned out to be another challenging year for GR. The decline in freight transportation, particularly in liquid cargo, persisted in 2018, with the top line down 3.3% y/y to US$ 167.5mn. Freight transportation revenue (56.8% of total) was down 9.1% y/y to US$ 95.2mn, driven by significant drop in oil products transportation, while dry cargos going through Georgia increased for the first time in the last 4 years (up 7.5% y/y). Logistic service revenue was also down 5.7% y/y to US$ 27.7mn. Other revenue streams increased in 2018, namely freight car rental was up 49.6% y/y to US$ 10.0mn and passenger traffic was up 18.7% y/y to US$ 10.8mn. Due to significant drop in its main revenue line (freight) over the last 5 years, the company carried out impairment testing of its PPE. The recoverable value was based on its value in use and resulted in a recognition of GEL 691.4mn or US$ 272.8mn impairment loss in 2018. Significant drop in EBITDA caused the net debt-to-EBITDA ratio to reach 6.2x in 2018, far above the Eurobond incurrence covenant of 3.5x. 

FY18 revenue was down 3.3% y/y to US$ 167.5mn, from last year’s low base of US$ 173.2mn. Freight transportation revenue, largest revenue category, was the main reason behind the decline in 2018. Oil products transportation (39.9% of total freight transportation) was also down 11.4% y/y to US$ 38.0mn, while crude oil transported was negligible. On the positive note, dry cargo transportation increased for the first time in the last 4 years, up 7.5% y/y to 6.9 tons, however reduced tariffs and changed product mix caused revenues to fall 5.0% y/y to US$ 55.7mn. Logistic service revenue was also down 5.7% y/y to US$ 27.7mn. Other revenue sources posted growth in 2018, particularly freight car rental revenue up 49.6% y/y to US$ 10.0mn. In addition, GR managed to increase passenger traffic revenues.

Operating expenses (excluding impairment loss on PPE) were up 2.8% y/y to US$ 152.1mn in 2018. This growth was mostly due to increased employee, fuel and other expenses. Reduced revenues and increased operating expenses caused the 14.4% y/y decrease in adjusted EBITDA to US$ 61.9mn in 2018, which translated into an adjusted EBITDA margin of 36.9% compared to 41.8% in 2017. 

US$ 272.8mn impairment loss was recognized in 2018. Due to continued decline in freight transportation volumes, the company carried out impairment testing of its assets in 2018. The recoverable value was calculated by discounting forecasted revenues for 2019-37. Therefore, US$ 272.8mn impairment loss was applied to the PPE categories on pro-rata basis. As a result, the PPE balance reduced 25.3% y/y to US$ 682.4mn in 2018. Significant non-cash impairment loss resulted in negative bottom line of US$ 282.7mn. 

Deteriorated operating performance worsened net debt-to-EBITDA ratio, which came in at 6.2x far above the Eurobond covenant of 3.5x. The company’s net debt-to-EBITDA ratio has been above the covenant for the last two years, limiting the company’s ability to incur any financial indebtedness in the medium-term. 

Main Line Modernization Project is the only ongoing capital project by GR. As the company has renegotiated the payment structure with the construction company, the operating cash generated will be enough to cover the Capex requirements in the coming years.


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