by Laura Gardner Cuesta, and Alesia Sidliarevich
As the Bank of Georgia prepares to issue the first ever Eurobond denominated in lari (GEL), the Eurasian country’s local currency, four buysiders out of five polled think the FX risk justifies a premium over local interest rates of 8%-9%.
Georgia’s second largest private bank intends to issue a minimum of USD 200m-equivalent in a three-to-five-year note, with the proceeds to support lari-denominated lending to retail banking clients, finance existing liabilities and other general corporate purposes.
The private lender roadshowed in Europe and the US last week, hoping to convince EM investors who traditionally invest in US dollars that a GEL-denominated, Euroclearable note can suit their needs. Renaissance Capital and JPMorgan are arranging the issue.
“Everybody loves them, if anybody can pull a local currency ‘Euroclearable’, it is them,” said an EM investment analyst.
“It’s certainly getting a lot of attention from yield-hungry, cash-flush investors who are keen to invest in one of the fastest growing economies in the CIS region” said a banker on the deal, “Given the limitations of the domestic market, the issuer is looking to break open a new sort of funding.”
With the notes’ proposed Eurobond structure, investors are guaranteed convertibility into USD, the lead banker explained. They will be allowed to make the initial payment in dollars, using the rate offered by the Bank of Georgia, and all subsequent coupon payments will be made at the prevailing exchange rate at the time.
As a result, investors do not need GEL deposits in the country, as would be the case for pure local-currency bonds. This reduces their exposure to the country’s banking system risk, by minimising the number of steps in the currency-exchange process that the government can intervene in, according to an EM credit researcher.
However, bondholders would still be exposed to currency fluctuation, both the banker and three of the buysiders noted, a concern for a lari that lost 35% of its value against the dollar between 2014 and 2016, but has picked up by 9.1% in 2017, according to the bond’s marketing material.
But this 1Q17 appreciation could be short-lived, as the USD/GEL, which is 2.41 at the time of writing, is forecast to hit 2.52 by 1Q18 and 2.9 by 2020, according to wesbite TradingEconomics.
Creditworthiness weakened by FX
Bank of Georgia is a well-liked credit, and the buysiders highlighted its strong revenue growth record, solid profitability, competent management, all of which have boosted the LSE-listed group’s stellar equity performance.
Although its non-performing loan (NPL) ratio grew from 3.4% in FY14 to 4.4% in FY16, the bank boasts a 85% NPL coverage ratio, rising to 131% if adjusted for collateral value. Capitalisation was not a concern either, with its Tier 1 capital adequacy ratio (CAR) at 10.1% and its Total CAR at 15.2% in 1Q17.
Bank of Georgia is backed by development finance institutions, with the investment analyst noting the International Finance Corporation’s commitment to buy USD 45m of the new notes.
But again, FX risk dampened the mood. “The credit is more or less strong, but it suffers from the same foreign-exchange issues other CIS financial institutions have” said a credit analyst, “Their high level of asset dollarisation makes asset deterioration a real threat if the currency depreciates.”
Foreign-currency loans make up 64.8% of the group’s loan portfolio, most of which is US dollar-denominated.
The credit analyst cited International Bank of Azerbaijan’s recent voluntary restructuring announcement as a case in point of what can go wrong in times of extreme currency troubles, adding: “I think the same could happen to Bank of Georgia.”
“It’s good they’re doing this bond, it will address the bank’s portfolio imbalances by increasing its lari-denominated assets,” he concluded.
Going local for comps
Two of the buysiders polled said the lack of liquidity in the Georgian market, combined with the small issuance size, put them off the bond. Others with TRY and RUB did not want the additional currency risk.
Those who would buy looked to local markets for guidance on how to price the lari-denominated Eurobond, shunning both the bank and the sovereign’s outstanding Eurobonds.
“Bank of Georgia’s GEL-Eurobond is a different animal [to the bank’s 2023s and the government’s 2021s]” said a portfolio manager. “I’m using the bank’s own local lending rates, which are closer to 8%-9%, as a base, but there will have to be a pickup.”
The issuer seems to have acknowledged this and is aiming to price above 10%, according the investment analyst, who attended the roadshow. These were fair and achievable aspirations in his view, but still not enough to get him interested in the paper.
An alternative others mentioned was to benchmark against the more established local sovereign curve, with maturities spanning between 2017 and 2025. A local 2020 note was quoted at 8.25%/9.71% yield, a wide range signaling limited trades, while a 2022 note was quoted at 8.8%-mid yield.
The credit analyst agreed with both approaches: “I would look at a mix between the local sovereign curve and local funding rates, adding a premium to compensate for convertibility and liquidity concerns.”
With regards to tenor, the first PM strongly advocated for the three-year maturity, saying: “I don’t know anyone with a longer-term view on the currency.” But some roadshow attendees felt the issuer was keener on the longer tenor.
This week’s business
Bank of Georgia intends to price the bond this week, according to the lead banker, but he admitted that it might be necessary to give investors more time to get comfortable with the FX risk and the name, as the audience for Georgian credit is small.
“This is a high conviction trade – you have to have an opinion about the country, the currency, the banking system…” said the second PM, “People need time to think about it.”
This is not the first time investors are offered Bank of Georgia paper. The bank’s parent, BGEO Group, tapped international lenders in June 2016 with a USD 350m 6% 2023 note, to refinance a Eurobond due in 2017. The 2023 bond was quoted at 101.35 cash for a 5.74% yield and 376.97bps z-spread, according to Markit.
BGEO Group is rated BB- by S&P, Ba3 by Moody’s and BB- by Fitch.