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Fitch Upgrades Georgia’s JSC Partnership Fund to ‘BB’

Fitch Ratings has upgraded Georgia-based JSC Partnership Fund’s (PF) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to ‘BB’ from ‘BB-‘. The Outlook is Stable. The agency has also affirmed PF’s Short-Term Local-Currency IDR at ‘B’.

The upgrades follows the recent similar action on Georgia (see ‘Fitch Upgrades Georgia to ‘BB’; Outlook Stable’, dated 22 February 2019 at www.fitchratings.com) and reflects the link between PF’s ratings and those of Georgia (BB/Stable/B).

KEY RATING DRIVERS

PF is a state agent implementing the state’s development agenda and its prime mandate is to shape and develop private equity investments. The private equity market is currently undeveloped in Georgia, limiting the country’s growth potential. PF targets profitable projects in several key areas – agriculture, manufacturing, real estate and energy. Another of PF’s mandates is to oversee key national infrastructure corporations. The state endowed PF with 100% stakes in JSC Georgian Railway (GR), JSC Georgian Oil and Gas Corporation (GOGC), JSC Georgian State Electrosystem, and JSC Electricity System Commercial Operator.

Based on its Government Related Entities (GRE) Criteria, Fitch classifies PF as an entity with strong linkage to the Georgian sovereign (the government) and assesses the probability of the Georgian government providing extraordinary support to the company as high. Fitch applies a top-down approach and assessed the GRE factors’ score at 45, which irrespective of PF’s standalone credit profile, leads to an equalisation of PF’s ratings with the sovereign’s.

Status, Ownership and Control Assessed as Very Strong

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. 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 PF’s audit committee and external auditor, monitors and controls the use of government funds and property allocated to the entity.

Support Track Record and Expectations Assessed as Strong

Our assessment is mostly based on the long-term well-established national regulation that is generally supportive of PF’s financial viability. In Fitch’s view, PF is deeply integrated with the national budgetary and economic system as it holds stakes in the largest national corporations in Georgia, and plays the role of the government’s agent in state asset management. PF manages key state-owned companies in Georgia on behalf of the government, receiving regular dividends from the largest state-owned companies and investing the proceeds in economically viable projects.

We treat continuous in-kind contributions from the government in the form of pipelines, land plots and other properties along with an unchanged funding model via dividends from major state companies as evidence of support. We expect this to remain unchanged.

Socio-Political Implications of Default Assessed as Strong

Fitch views PF as an entity of strategic importance to the Georgian government and its financial default would endanger the continued provision of funding to a wide list of national industries. This is because PF is the only state financing vehicle to promote investments, stimulating growth of the national economy, including SMEs and other important industries.

The fund’s aim is to develop private equity investments in a wide range of economic projects generating positive economic returns, a market which is currently undeveloped in Georgia. As long as the Georgian government remains committed to its economic development agenda, we believe the fund’s strategic role in facilitating investments in the key sectors of the national economy, particularly in the energy sector and infrastructure development, will not change.