The FINANCIAL — “Further increases in salaries from the Georgian Railway would place added pressure on the company’s ability to achieve more appropriate levels commensurate for the current rating by Fiscal Year 2015,” Jeanine Arnold, Director of EMEA Utilities and Transport at Fitch Ratings, told The FINANCIAL.
The FINANCIAL — “Further increases in salaries from the Georgian Railway would place added pressure on the company’s ability to achieve more appropriate levels commensurate for the current rating by Fiscal Year 2015,” Jeanine Arnold, Director of EMEA Utilities and Transport at Fitch Ratings, told The FINANCIAL. Fitch expects a high volume of transportation in 2015 once the Baku-Tbilisi-Kars railway, expected to open in 2013, becomes fully operational. Volumes transported were expected in FY13 but now volumes are not expected until 2015, Arnold told The FINANCIAL.
Some workers of Georgian Railway went on strike on 14 November, demanding an increase in salaries and improved working conditions. On the same day it was said that Georgian Railway had reached an agreement with the workers on all the issues. Fitch said that this could harm the company’s ability to develop.
The Financial Officer of Georgian Railway Irakli Titvinidze declared that an agreement was reached with workers. “The agreement involves a fair bonus system for working overtime, compensation and length of service and merit-based pay system for work. This agreement will extend to all employees of the Railway,” he said.
Because of the strikes the construction of the Baku-Tbilisi-Kars railway had to be delayed. The Kars-Tbilisi-Baku railway, or Kars-Akhalkalaki-Tbilisi-Baku railway, is a regional rail link project to directly connect Turkey, Georgia and Azerbaijan. The project, originally to be completed by 2010, was previously delayed to 2013, but as of August 2013 is scheduled for completion by 2014.
“Project construction of the Baku-Tbilisi-Kars railway will be completed by the end of 2014 at the latest, Turkish Minister of Transport, Shipping and Communications Binali Yildirim told to the local Turkish media on November 21.
According to the Minister, construction work within the framework of the BTK railway project is continuing. Azerbaijan has allocated a USD 775 million loan for the construction of the Georgian section of the railway. Funding for the project from the State Oil Fund is carried out in accordance with the 2007 presidential decree on the Baku-Tbilisi-Kars railway project.
The Georgian Railway’s outlook is negative, according to the latest Fitch rating published on 5 November. Fitch Ratings has affirmed Georgian Railway LLC’s (GR) Long-term foreign and local currency Issuer Default Ratings (IDR) at ‘BB-’ and Short-term foreign and local currency IDRs at ‘B’. The decision was made due to the company’s lower than expected volumes and higher costs.
Fitch assesses the links with Georgia (BB-/Stable) to have weakened over the past 18 months due to a continual reduction in the state’s direct ownership, material dividend payments in a high capex period, and more recently, some pressure to increase employee salaries given the recent elections.
There has also been a perceived reduction in government backing for key investment projects, such as the Tbilisi Bypass. This weakening has led to a change in Fitch’s application of its Parent and Subsidiary Rating Linkage methodology.
Decrease of turnover was caused by Tengiz Chevron Oil (Kazakhstan) oil decrease, which returned with increased volumes from the third quarter and also the bauxite plant closing in Baku, Georgian Railway said in official response to Fitch Ratings on 13 November. Till this date the company was avoiding making any comment regarding the issue.
“The volume of cargo transportation increased in the third quarter of 2013. For the third quarter cargo turnover has increased by 10.4% compared with the second quarter. Also there was a 65% increase in EBITDA. The EBITDA Margin has become 54%, when it was only 41% in the second quarter. The quantity of transported cargo when comparing the year 2013 with the year 2012 is decreasing. Transportations in September 2013 were 1,674,192 transportations less compared with the same period of the year 2012,” said official statistics distributed by the Georgian Railway.
“A negative outlook was made from substantial underperformance relative to the company’s previous forecasts and consequently Fitch’s own forecasts. This in turn led to a considerable weakening in the company’s credit metrics, which were no longer considered commensurate for the rating,” Jeanine Arnold, Director of EMEA Utilities and Transport, told The FINANCIAL.
“As mentioned in the press release, levels which are appropriate are FFO adjusted leverage below 3.5x and FFO fixed charge cover greater than 3.5x. In FY12 metrics were weaker than this and are expected to remain at weaker than these levels in FY13 and FY14. However we do expect an improvement in FY15 once the Baku-Tbilisi-Kars railway becomes operational and assuming capex and dividends reduce as the company has said they will. Where these three things do not happen then there may be further negative rating action. The Negative Outlook gives the company some benefit of the doubt that metrics will improve in the short-term.”
“Georgian Railway has already raised salaries over the last 12 months in response to employee demands. Further increases would place further pressure on metrics and the company’s ability to achieve more appropriate levels commensurate for the current rating by FY15,” he added.
“Strikes could potentially delay construction of the railway and therefore when Georgian Railways can begin to make greater earnings from increased volumes. As mentioned above, where there is a delay in volumes transported via the Baku-Tbilisi-Kars route, then this could prevent a deleveraging to levels considered commensurate with the rating. When there are further delays or this is stopped then this could lead to further negative rating action.”
“There is a delay in the construction of Baku-Tbilisi-Kars for when it will become fully operational and begin to increase volumes transported by Georgian Railways. Volumes transported were expected in FY13 but now volumes are not expected until FY15. It is the Tbilisi Bypass which has stopped for the time-being,” said Jeanine Arnold, Director of EMEA Utilities and Transport.
“Georgian Railways employs a large number of Georgian employees. The Baku-Tbilisi-Kars route will be important in this regard but also in increasing volumes transported through Georgia,” Jeanine Arnold said.
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