Sale of Georgian subsidiary would be credit positive for KazTransGas, says Moody’s

By bne IntelliNews September 20, 2016

KazTransGas (KTG) has confirmed plans to sell its Georgian subsidiary KazTransGas-Tbilisi (KTGT) to Georgian Industrial Group and the divestment would be credit positive for the Kazakh state-owned gas pipeline operator, Moody's said in a note on September 19. 

KTG is currently negotiating the details of the transaction with the deal expected to close this year. Moody’s sees the transaction as credit positive, because KTG would dispose of an asset that it has not been able to control since 2009, and will strengthen the company’s liquidity. At the same time, an increase of its cash balance following the disposal of KTGT would reduce the company’s reliance on $335mn under a loan agreements signed with the European Bank for Reconstruction and Development (EBRD) in May 2016 or support from its parent in fulfilling its short-term debt obligations. That is based on the assumption that KTG will not generate material free cash flow in 2016 “because of its substantial capex”.

KTGT was founded in 2006 as a 100%-owned KTG subsidiary. The same year, KTGT purchased a monopoly gas distributor in Georgia’s capital city of Tbilisi for $12.5mn. The company invested approximately $130mn in 2006-2009 into Georgia’s gas distribution system. In 2009, Georgian Oil and Gas Corporation filed a lawsuit against KTGT to recover $40mn of overdue debt, which KTG disputed.

That same year, following a court ruling, the Georgian authorities dismissed KTG’s general manager, replacing him with its own appointee. Since then, KTG formally lost control of KTGT despite having 100% ownership. Georgia and Kazakhstan engaged in multiple  intergovernmental discussions on the issue of KTG restoring control over KTGT between during 2009-2015, but no progress has been made.

In September 2015, KTG submitted a pre-arbitrage notice to the Georgian government. Moody's considers the sale of KTGT as a better alternative to a costly international arbitration process. KTC is expected to generate $30mn-$50mn from the sale, according to Moody's estimates.

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