Most sovereign states would not allow the prime minister – a mere politician – anywhere near the roadshow for an inaugural bond issue, unless, perhaps, he formerly chaired the central bank and was, in a previous life, a London-based senior investment banker. Meet Lado Gurgenidze, whose reassuring presence helped to make the Democratic Republic of Georgia’s debut issue an unqualified success.
Georgia brought some much-needed excitement to the international bond markets in April with a well-timed maiden visit to raise $500m in five-year money. The paper’s rarity value and Georgia’s upbeat economic story had investors jostling to participate.
“This year was our only window,” says Mr Gurgenidze. “We have passed new laws that will establish a new fiscal paradigm by making fiscal deficits illicit [from 2009]. Laws change over time but, for now, this issue is a one-off.”
Rarity value
That is rarity value, indeed. Admittedly, scarcity is not worth much without a solid name behind it. “But it gave investors another reason to do their homework on the credit,” says Mr Gurgenidze.
Those who did found a fast-growing economy with five years of uninterrupted growth behind it, rising foreign direct investment, and what Mr Gurgenidze calls a “Schumpeterian revolution” in entrepreneurship. “There are more than 50,000 new businesses a year in Georgia,” he says. “Our total of 360,000 registered businesses is one of the highest in the world on a per capita basis.”
Georgia fares well in other regional and international comparisons. It has an aggressive privatisation programme, and is the only one of the Commonwealth of Independent States to have fully privatised its banking sector. “Our very radical reforms have made this the 18th freest economy in the world, according to the World Bank,” says Mr Gurgenidze. “That puts us ahead of the BRICs [Brazil, Russia, India and China], our eastern European peers and most of the EU. It is generally a very free and open economy.”
Taxes have been lowered and although inflation has been edging up (to 9.2% in 2007) there are plans to introduce explicit inflation targeting next year.
Real gross domestic product (GDP) growth rose from 9.4% in 2006 to 12.4% in 2007 and external public debt has fallen from 37.8% of GDP in 2003, the year of the so-called Rose Revolution, to 14.5% in 2007. During the same period, foreign reserves grew from $191m to $1.3bn.
Mr Gurgenidze says that the country has the world’s “most progressive” labour code (meaning that it is easy to hire and, more importantly, fire) according to the World Bank and the International Labour Organisation; and it has the third lowest weighted average import tariffs after Hong Kong and Singapore.
Georgia’s economy is more broadly based than many other emerging market economies, less reliant on natural resources – and hence less affected by volatility in commodity prices. Imports are outpacing exports, however, and a widening current account deficit (from 9.4% in 2003 to 18.8% in 2007) is one of the nation’s less positive indicators. Georgian paper is not without political risk either, particularly as Russia grows more acquisitive in the territories of Abkhazia and South Ossetia.
The negatives were not enough to dissuade investors, however. Some were already familiar with the country, particularly since Bank of Georgia’s inaugural $200m five-year issue last year (not to mention its $100m rights issue on the London Stock Exchange in February).
A four-country roadshow in the first week of April was enough to persuade many less familiarised accounts; and joint bookrunners UBS and JPMorgan judged the following Monday conducive to launch a $500m five-year issue with guidance of a 7.5% to 7.75% coupon. They considered that although the US has more of a taste for 10 years, the Reg S issue could appeal to the greater European appetite for shorter maturities. It did.
Immediate orders
Orders worth $1.6bn came in quickly from more than 100 accounts, the majority of them fund managers specialising in emerging markets. The deal was priced on the same day at 7.5%, without being increased in size. The bulk of it went to Europe, although US offshore accounts took 13%.
And there was a good reason why Georgia was happy to stick with the transaction’s original size – because the deal was less about funding than about setting a benchmark for future issuance from Georgian corporates. “We now have 15 companies in Georgia with earnings before depreciation, interest, taxes and amortisation of $30m or more,” says Mr Gurgenidze.
Expect, therefore, to see some other Georgian names join the Bank of Georgia in the international markets. Likely issuers would seem to include telecoms operators such as United Telecom of Georgia; privatisation candidate Georgian Railways; and one or more of the country’s mining firms.