Issue 3, 2018. June-July



The decision of two major Georgian consumer goods companies to seek lari-financed bonds to fund expansion projects is a signal that the Georgian financial markets are developing beyond banks

Sally White

Georgia's consumer goods and financial industries are both modernizing rapidly, and to mutual benefit. A recent prime example is two of the country's biggest consumer brands, Nikora Trade (Nikora) and Georgian Beer (GBC). Both are in the throes of funding rounds for new moves to expand their businesses and are sourcing around 50 million lari from the emerging local lari bond market, with public issuance planned in Q2-Q3.

GBC has about 30 percent of the local beer market, and 17 percent of the soft drinks and lemonade market (according to European ratings agency Scope). Its needs the GEL 20 million bond to realize its growth ambitions: a market share of 20 percent in juices and a "significant" increase in exports to neighboring countries. Nikora has over 19 percent of Georgia's food retail market, again according to Scope, (which excludes bazaars and brand shops) with 220-plus shops. Its funding is to enable it to continue consolidation of the food retail market, expediting the contraction of Georgia's bazaars by opening 400 new stores over the next three years. It also plans discount shops and own-label products. Scope believes Nikora can do this despite the presence of Carrefour, since the international retailer's format is for city hypermarkets, while Nikora is focused on a national network of smaller, neighborhood shops. There should be plenty of space for it to grow given that the size of the "informal" retailers' market share is put by Scope at around 70 percent. Its 30 million GEL bond is hoped to achieve just that kind of market share.

Moving Beyond Banks

For Georgian financial markets, these new bonds are a signal that the country is able to develop a funding base in its local currency outside of bank loans. The corporate sector has historically funded bonds in dollars, and even in that currency, bond issuances have been a relatively infrequent event. The authorities are now steering the markets away from dollars, and GEL bonds have already been issued by the financial sector.

GEL bonds are gaining acceptance, says Irakli Elashvili at TBC Capital, the advisory and investment banking arm of TBC Bank, which is the sole arranger of both these two bond issuances. "The level of interest is steadily increasing as corporates hear of more examples of bond placements," he commented. Investors are being found, though so far largely from among local financial institutions (banks and funds) and individuals. For the rating agency Scope, a Berlin-based group and relative newcomer to international ratings markets (joining Moody's, Standard & Poor's and Fitch), these bonds are evidence of Georgian potential. Companies (and countries) are required to undergo a credit rating assessment by one of the major agencies before acceptance in international financial markets. Scope, along with the other major rating agencies, has been approved to do this in Georgia by the Georgian National Bank, and is offering helpful terms.

Optimistic Outlook

"Our pipeline is promising and we are optimistic that our activities in this market will continue to grow," says Torsten Hinrichs, managing director of Scope Ratings. Scope's Georgian ratings are largely favorable in international comparisons both for Georgia as a country and the companies it has analyzed so far.

Scope approved of GBC's diversified portfolio, market share and strong balance sheet, which give a "high level of credibility and financial sustainability." It also praises the achievements of just five years of production, "reflecting GBC's focus on premium brands and quality vis-à-vis the competition." GBC is the first domestic brewer to operate under licenses from international brewers.

The new bond will, Scope says, cover most of 2018's scheduled 22 million GEL capital investment. It notes that Czesar Chocheli, "who has a 65 percent stake in the company," has built a "Western-style brewery, equipped with a state-of-the-art brewhouse and filling line technology (KHS, Krones) from scratch."

GBC's own comment is that "Georgian companies should come up with European-level companies in terms of market organization and production." At a recent press conference, GBC Director Kakhaber Kotrikadze said it has a 7 million euro budget for 2018-19 for developing a natural juice production project. The company has invested heavily over its entire history, spending 150 million GEL to create a wide product range, with a split of 60 percent in beer brands and the rest in soft drinks.

On Nikora, Scope commented that it has "strong purchasing power and integrated holdings with product suppliers," as well as "possibilities for consolidation in this industry." It anticipates that "the Georgian government will gradually implement new laws and frameworks (based on the stricter control of hygiene standards, for example,) to decrease the weight of this kind of retail in the overall economy." Scope praises Nikora for gaining one of the highest market shares (at 19 percent in 2017 versus Carrefour's 22 percent) and its plan to open 120 shops in 2018, followed by 122 in 2019 and 229 in 2020. It likes the cost advantages that exist with ownership of food suppliers:"In 2017 this vertical integration led to 26 percent of Nikora's revenues [. . .]" It also praises the fact that Nikora's profits "rank it with international peers."

Last summer Nikora issued a $10 million bond two-year bond, which it has already repaid. Further growth in the GEL bond market looks assured. Prospects are improving as corporates become accustomed to the necessary disclosures of business details, Irakli Elashvili notes. It helps that there is new Georgian legislation requiring large companies to regularly publish IFRS figures, anyway. These are standards for the presentation of companies' accounts that are followed internationally, giving full disclosure of their finances which enable analysis and comparisons. Aware of the need to help companies grasp the GEL bond opportunities, TBC is not only pitching it but "intends to lead a series of discussions on the topic with wider audiences to promote better understanding," Elashvili says. "There are a number of advantages to having the bond in a funding-mix structure. Namely, tenor (bonds are usually medium- to long-term funding instruments), bullet structure (the company only pays coupon [payments/interest] until redemption, therefore improving the cash flows), security structure (in most cases the bonds are unsecured liabilities), withholding and capital gains tax benefits (exemptions) for investors if a public bond," he adds.

"Last but not the least, is the diversification benefit that corporates get while getting a bond into their funding mix," he explained.