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Fitch ups Georgian railway to ’BB-’, stable outlook

17 December 2011 08:21 (UTC +04:00)

Baku. Vahab Rzayev â€“ APA-Economics. Fitch Ratings has upgraded Georgian Railway LLC’s (GR) Long-term foreign and local currency Issuer Default Ratings (IDR) to ’BB-’ from ’B+’. The agency has also upgraded GR’s foreign and local currency senior unsecured ratings to ’BB-’ from ’B+/RR4’ and GR’s USD250m notes due 2015 to ’BB-’ from ’B+/RR4’. The Short-term foreign and local currency IDRs have been affirmed at ’B’. The Outlook on the Long-term IDRs is Stable.

The rating action follows the upgrade of Georgia’s Long-term foreign and local currency IDRs to ’BB-’ from ’B+’ on 15 December 2011 (see Fitch Upgrades Georgia to ’BB-’; Outlook Stable at www.fitchratings.com). GR’s IDRs have been aligned with Georgia’s sovereign ratings (’BB-’/Stable/’B’).

The rating alignment reflects the company’s strong linkage with the government. This stems from the company’s 100% direct and indirect ownership by the government, its importance to the economy as the largest taxpayer and employer, its dominance of Georgia’s freight transportation sector, its strategic importance as the regional transit corridor and government backing for its two key investment projects. The latter is evidenced among other factors, by a dividend moratorium, future assistance with land disposals and refundable VAT. The Georgian government no longer guarantees any of GR’s debt. However, bondholders have a change of control (direct or indirect government ownership of less than 50%) put option.

Fitch considers GR’s standalone business and financial profile as commensurate with a low ’BB’ rating level based on the expectation that it will maintain its monopoly status and liberal tariff setting policy, along with a dominant market share in the provision of freight transportation services.

The agency notes that GR cancelled its unused CHF146m loan from the European Bank for Reconstruction and Development (EBRD; ’AAA’/Stable) which may increase pressure on the company to proceed with land disposal ahead of the 2015 bond maturity. The short-term liquidity remains adequate supported by GEL253m of cash and deposits (as of 30 September 2011) and GEL35m unused credit lines due in 2013 and 2014.

Fitch believes that the transfer of a 24% stake in GR from the government to a newly created Georgian Partnership Fund (which is fully government owned) marginally weakened GR’s links with the government. Specifically, there may be stronger pressure to renew dividends, which are no longer restricted after the EBRD loan cancellation. This would weaken GR’s liquidity during the heavy capex period. This or other evidence of weakening government support, would likely result in the separation of GR’s ratings from the sovereign ratings. In such a scenario, GR’s ratings may not be automatically upgraded if there was a further sovereign rating upgrade.