Fitch Affirms Georgia's JSC Partnership Fund at 'BB-'; Outlook Stable

Fitch Affirms Georgia's JSC Partnership Fund at 'BB-'; Outlook Stable

Fitch Affirms Georgia's JSC Partnership Fund at 'BB-'; Outlook Stable

The FINANCIAL -- Fitch Ratings has affirmed Georgia's JSC Partnership Fund's (PF) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BB-' with Stable Outlooks. The agency has also affirmed the company's Short-Term Local-Currency IDR at 'B'. 

"PF's ratings are equalised with those of Georgia (BB-/Stable/B), which reflects the Fund's legal status, tight control by the government and 100% state ownership and its important role in the government's economic policy. Fitch uses its public-sector entities rating criteria in its analysis of PF and views it as being credit-linked to the sovereign. We view the Georgian government's ability and intent to support the fund's potential issued or guaranteed debt as a key factor in determining rating equalisation with the sovereign," Fitch Ratings reported.

KEY RATING DRIVERS 

The affirmation reflects PF's unchanged special legal status as an extension of the government in managing its strategic assets and acting as a development arm and quasi-budget vehicle of the government. Fitch views Georgia's willingness to support PF as largely unchanged, as the fund remains important state agent in implementing its development agenda.

Legal Status Assessed as Stronger 

PF is 100% owned by the state and operates under its own act - Georgia's law on JSC Partnership Fund, highlighting its unique nature and special status. Its mandate is to promote private equity investments in Georgia and oversee key national infrastructure corporations. The state endowed PF with 100% stakes in Georgian Railway (GR, B+/Stable), JSC Georgian Oil and Gas Corporation (GOGC, BB-/Stable), JSC Georgian State Electrosystem, and JSC Electricity System Commercial Operator. 

Strategic Importance Assessed as Stronger 

Fitch views the fund as an entity of strategic importance. Georgia's government uses PF as a financing vehicle to promote investments stimulating growth of the national economy. The fund's aim is to develop private equity investments in wide range of economic projects generating positive economic returns, a market which is currently undeveloped in Georgia. Along with private funding PF co-invests in agriculture, manufacturing, real estate and energy. 

While the Georgian government remains committed to its economic development agenda, we believe the fund's strategic role in facilitating investments in the backbone sectors of national economy, particularly in the energy sector and infrastructure development, will not change. 

Control Assessed as Stronger

Fitch views the government's control and oversight over PF's operations as strong. The fund's supervisory board is chaired by the Georgian prime minister and composed of leading cabinet members and independent directors from the private sector. The state mandates PF's key policies on debt, dividends and investments, appoints its audit committee and external auditor, monitors and controls the use of government funds and property allocated to the entity.

Integration Assessed as Stronger 

"In Fitch's view, PF is deeply integrated with the national budgetary system as it holds stakes in the largest national corporations in Georgia, and plays the role of the government's quasi-budget agent. We treat recent state contributions to the fund in the form of pipe-lines, land plots and other property along with unchanged finding model via dividends from its portfolio companies as a rating support factor and evidence of financial integration with the sovereign," Fitch Ratings said.

Debt and Liquidity

The bulk of PF's debt stock comprises a USD150 million bank loan from Credit Suisse, maturing in 2020. In September 2017 the fund should make about USD31 million interest and principal amortisation payment. To meet this obligation the fund already accumulated USD32.3 million at the special reserve account as of 1 September. 

In 2018-2020 PF will experience repayment peak with debt servicing increasing to around USD50 million annually. This will require higher dividend inflow (averaged about USD20 million in 2015-2017), which may be difficult to achieve taking into account the slow recovery of PF subsidiaries' profitability. This is mitigated by a strong cash position (USD104 million as of end-2016). PF could also occasionally borrow from its key subsidiaries (GR and GOGC).

RATING SENSITIVITIES

Sovereign-Linked Ratings: Any positive rating action on Georgia, coupled with continued support from the state, would be rating positive, as PF is credit linked to the sovereign. 

Weaker links with the state would be rating negative, a downgrade of Georgia would also be negative.