Georgian Oil and Gas Corp. JSC Ratings Placed On CreditWatch Negative On Debt Refinancing Challenges

  • Georgian Oil and Gas Corp. JSC (GOGC), the 100% indirectly government-controlled energy company in Georgia, is facing a large $250 million Eurobond maturity in April 2021, which represents essentially all of its debt.
  • In our view, the company is unlikely to generate enough internal liquidity sources, and refinancing will be difficult in the coming months due to challenging capital market conditions for emerging market issuers.
  • We recognize management's proactive approach to refinancing in the past and the very high likelihood of extraordinary government support, and believe that GOGC may potentially consider asset sales to address the upcoming maturity.
  • We are placing our 'BB-' long-term issuer credit and issue ratings on GOGC on CreditWatch with negative implications, reflecting the challenges in refinancing the $250 million 2021 Eurobond.
MOSCOW (S&P Global Ratings) March 24, 2020--S&P Global Ratings today took the rating actions mentioned above.
The company is facing a large $250 million Eurobond maturity on April 26, 2021, while capital market access for emerging market issuers is difficult. Given the current turbulence on international financial markets, refinancing is the key challenge for the company, despite management's track record of completing previous refinancing exercises well in advance. Realistically, we think GOGC might attempt to tap the capital markets in the summer or autumn of 2020, while potentially selling assets or approaching the government for financial support as back-up options. We will closely monitor the situation in the next two-to-three months to identify how GOGC is tackling the refinancing task. We don't expect the company to generate sufficient liquidity to repay the bond, which represents essentially all of the company's debt and is 3.5x times larger than its EBITDA. In our base-case scenario, we envisage GOGC generating neutral or slightly negative discretionary cash flow (DCF) in 2020. The company's cash position at Dec. 31, 2019, was just Georgian lari (GEL) 136 million ($47 million), and it did not have any committed long-term credit lines. The local banking system is relatively weak and small, so we believe that refinancing with a bank loan might also be difficult.
We continue to view the probability of extraordinary state support to GOGC to be very high. Along with Georgian Railway JSC, GOGC is one of the largest corporate borrowers in Georgia. We continue to believe the government has a strong incentive to support GOGC, because a theoretical default implies considerable reputational damage for the sovereign and other Georgian issuers' ability to borrow externally. GOGC is an important government arm in developing the electricity sector and operates two recently constructed gas-fired power stations comprising 25%-30% of the country's total electricity generation. In addition, GOGC is a part of several intergovernmental agreements for gas trading operations (with Azerbaijan and Russia, notably), which we think justify the company's importance for the government and motivation to provide support in case of financial difficulties.
The Gardabani 2 power station, launched in January 2020, should add more EBITDA stability and improve GOGC's cash flows. Under our base case, Gardabani 2 should add GEL70 million to EBITDA in 2020. This compares with GEL100 million contributed by Gardabani 1 in 2019, of GEL193 million total EBITDA. The new launch will mean about 70% of EBITDA is sourced from electricity generation, with the rest comprising much more volatile gas trading activities and a smaller contribution from pipeline rent fees and crude oil sales. Both power stations operate under favorable investment contracts which have guaranteed U.S.-dollar-denominated returns on investments. We understand that GOGC is considering construction of a third $200 million gas-fired unit, mirroring the terms and specifications of Gardabani-2. This project will only move forward if the refinancing of existing debt is successful and new long-term funding is available for capital expenditure (capex).
New projects will also likely be partially affected by a lower social gas price in Georgia. We see pressure on the company's cash flows from the decline in the social gas price, to $100 per thousand cubic meters (/TCM) from $110/TCM. This will be only partly offset by lower gas purchase prices, in our view, because GOGC buys gas under several long-term contracts, which means effective average purchase prices could significantly differ from global market rates. We estimate the negative effect on GOGC's EBITDA to be GEL20 million-GEL30 million in 2020.
The CreditWatch placement reflects our concerns about the company's ability to refinance the $250 million Eurobond maturity coming due in April 2021 under the current very challenging capital markets conditions. We recognize GOGC's historically prudent and proactive approach to liquidity management. At the same time, the key risk is that the ongoing turbulence on international financial markets will likely limit GOGC's ability to refinance in the coming months.
If the company is unable to secure sufficient liquidity by June 2020, and if the government of Georgia does not provide timely support, we see a risk of a downgrade, possibly by more than one notch. Firstly, if refinancing progress is limited, we will view liquidity as weak, which by itself would cap the stand-alone credit profile (SACP) assessment at 'b-', compared with our current assessment of 'b+'. Secondly, if the government doesn't step in during difficult times, we may re-assess our view on the likelihood of timely and sufficient state support, leading to lower uplift above the SACP.
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