Issue 4, 2019. August-September



TBC Bank recently issued Georgia's first international traded bond. Industry specialists say the $300-million, five-year Eurobond is a sign that the Georgian financial market is becoming more attractive to foreign investors.

Sally White

For the first time Georgia's stock market has a bond that trades internationally-an important step toward making the market attractive to foreign investors and moving toward becoming a regional hub.

TBC Bank issued a debut $300 million, five-year 5.75% Eurobond, which has been admitted to both the Irish Stock Exchange (Euronext Dublin) and the Georgian Stock Exchange

"This transaction is very important because it is the first case of a dual listing on the local market, when a security can be traded both domestically and internationally. Dual listing of TBC Bank's Eurobonds makes it possible to purchase them on the Georgian Stock Exchange through Georgian brokers," Chief Executive Officer of the Georgian Stock Exchange George Paresishvili stated.

"We assume that this and other similar transactions, which we are expecting to occur in the future, will dramatically increase local investors' base and support capital market's development in Georgia."

Not long before TBC Bank issued the bond, the company's broking arm TBC Capital issued a report on the prospects of the bond market.

While voicing caution on Georgia's major financial market, the TBC report, from its capital market advisory and broking arm TBC Capital, concluded that Georgia's bond market has established "a strong foundation" and can show "substantial growth."

Further action to enhance and liberalize the market, however, is required to build a financial hub in Georgia, the report said in an update on the bond market, "Fixed Income Securities in Georgia," listing several courses of action.

For example, while several initiatives have been launched successfully "more needs to be done on creating an attractive framework for foreign companies to list."

Another suggestion is widening the availability of international post-dealing services. "Future growth in market size will (also) be tied to further increases in secondary market liquidity. Additionally, the development of risk management products will help better manage the inherent risk of debt securities," the report adds. Some of this, especially facilities that will enable "hedging" to cover risk, is already in the regulatory pipeline, including new insolvency laws and laws enabling Georgian trading of government securities. There will also be regulations on the setting up of investment funds.

The successful initiatives TBC Capital welcomes so far range from revitalizing the local stock exchange and introducing tax breaks for locally listed securities to promoting transparency by requiring companies to publish international-standard accounts.

The "necessary infrastructure" is now in place, including a regulatory framework and rules to govern the markets. (These were propelled by the signing of the Association Agreement with the EU in 2014.) In addition, in December 2018, the market's software was upgraded and arrangements were made to link with German-owned Clearstream for international post-dealing services, which helped open Georgia up for international investors.

So, the market picture is looking positive, albeit growth is from a small base. Local bonds leapt by 40 percent last year to reach 1.2 million lari, driven by issuance by local companies and international financial institutions. New publicly issued and listed bonds totalled 825 million lari, up 205 percent. "Tax breaks on publicly listed securities incentivize corporates to publicly issue bonds, as well as increase the investor base," states the "Fixed Income Securities in Georgia" report.

The Georgian government remained by far the biggest issuer of local bonds, with 72 percent of the outstanding bonds last year-encouraged to raise money locally in lari for its increasing funding requirements because of the fluctuations in the currency. Then came the IFIs, accounting for 21 percent, and lastly corporates with seven percent.

Major local corporates rely on London-issued Eurobonds rather than lari ones to finance their large funding needs and, at the end of 2018, Georgia had five outstanding Eurobonds. However, the local regulatory framework allows issuers to dual list their issues and in June this year TBC Bank announced that $300 million Eurobond.

Investors have been largely the Georgian commercial banks, followed by high net worth individuals (resident and non-resident).

In future, two new influences are listed by TBC Capital as likely to affect the growth of Georgian financial markets. Firstly, it says, there will be bond purchases by the new Georgian government pension fund. Secondly, a portion of the money that non-residents hold on deposit in Georgian banks, TBC believes, is likely to be switched to the securities market.

Strong macro-economic drivers for the Georgian bond market have been the favourable credit ratings from the major international agencies, S&P, Fitch, Moody's and Scope. Their ratings were based on "the belief that Georgia has the potential to outperform the S&P official forecast for economic and external performances as well as continued compliance with IMF arrangements," the report says. The market is steadily expanding, as the numbers show. "In our view the Georgian bond market is making progress on widening its issuer and investor base. An increasing number of local blue-chip companies are eager to diversify their funding structure by issuing bonds. Many institutional and retail investors are also gradually increasing and expanding beyond just investing in local bank deposits," it states.

To ensure this momentum is maintained, and with an eye to international market trends, investor protection regulations are also on the government's priority list. These are "expected to be introduced throughout 2019."