Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1697749287146.pdf (Georgia)
Georgian Capital Market Development George Paresishvili, CEO GEORGIAN STOCK EXCHANGE 1 Evolution of corporate financing Firm size Firm age Information availability Small Start-up No track record Large Mature Track record Capital markets Public debt (bonds) Commercial Paper Private placement t i d e r C d n a t b e D y t i u q E Mezzanine financing Bank Letters of Credit, revolvers, loans Trade and supply chain credit Initial Insider/Angel finance Venture Capital Public Equity Capital markets Private Equity Financing tenor (from issuer’s perspective): Short-term Medium-term Long-term Source: World Economic Forum, Corporate Bond Market 2015 GEORGIAN STOCK EXCHANGE 21 June 2017 21 June 2017 2 Evolution of personal savings and investments Total personal income More wealth Total Savings Increasing reliance on capital markets Personal Financial Assets Discretionary consumption Taxes Essential consumption More risky Higher yield Alternative investments (hedge funds, PE) and wealth management “Retail” products (mutual funds, direct equity and debt instruments) Retirement (pension) and insurance products Hard assets (real estate, commodities) Less wealth Less risky Lower yield Bank deposits, CDs Increased personal income allows for accumulation of personal financial assets As wealth increases, saver tries to diversify savings to those that can provide increased yields and to protect from future income shocks This leads to purchases of retirement and insurance products; savers start to participate in retail capital market products and alternative investments This leads to increased need for capital markets GEORGIAN STOCK EXCHANGE 21 June 2017 21 June 2017 Source: World Economic Forum, Corporate Bond Market 2015 3 Corporate bond market structure Issuers Financial institutions • • Quasi-sovereigns • Non-financial institutions (corporates) Financial instrument/Capital Investors Financial intermediaries • Broker-dealers • Banks • Asset Managers • Asset managers (mutual funds, hedge funds) • Asset owners (insurers, pension
 funds, banks, governments, agencies) Market intermediaries and infrastructure providers Information and rating providers • Market benchmarks and indices • Data distribution vendors • Risk assessment providers (rating agencies) Exchanges Infrastructure providers • • Depositories/Custodians • Clearing and settlement Market enablers Regulation and legislation • Corporate governance and investor protection • Accounting and reporting standards • • Securities market regulation Industry regulation Social and macroeconomic policies • Pension/retirement policies • • Tax regimes Education (financial) GEORGIAN STOCK EXCHANGE 21 June 2017 21 June 2017 Source: Oliver Wyman, World Economic Forum, Corporate Bond Market 2015 4 Current stage of capital market development • Measuring progress • Equities and bonds GEORGIAN STOCK EXCHANGE 21 June 2017 21 June 2017 5 Sequence of corporate bond market (players) Stage 1: Establishing basic bond market processes Stage 2: Enhance infrastructure and processes for corporate bond market Stage 3: Widening the issuer and investor base Stage 4: Improving liquidity and risk management Stage 5: Expand integration with international markets Market characteristics -Types of market participants • Government/Quasi r e u s s I • Government/Quasi • • Financial Institutions Largest corporates Financial Institutions • Government/Quasi • • Medium/large corporates • Government/Quasi • Financial Institutions • Wider range of local • Government/Quasi • Financial Institutions • Wider range of local corporates corporates (including foreign) s r o t s e v n I Foreign investors (limited) • • Banks • Domestic Institutional (limited) Foreign investors • • Banks Foreign investors • • Banks • Domestic institutional • Sophisticated domestic retail Foreign investors • • Banks • Domestic institutional • Retail investors • Alternative investors Foreign investors • • Banks • Domestic institutional • Retail investors • Alternative investors GEORGIAN STOCK EXCHANGE 21 June
 2017 21 June 2017 Source: Oliver Wyman, World Economic Forum, Corporate Bond Market 2015, modified by GSE 6 Sequence of corporate bond market (policy) Stage 1: Establishing basic bond market processes Stage 2: Enhance infrastructure and processes for corporate bond market Stage 3: Widening the issuer and investor base Stage 4: Improving liquidity and risk management Stage 5: Expand integration with international markets Policy actions • • Establish basic market infrastructure Establish benchmark curve through government bond issuances • Develop institutional investors • • • Introduce corporate bond issuances Establish wholesale credit market Establish credit rating system • Reduce issuance costs and accelerate issuance timeline • Promote growth of asset management industry • Promote investor relations • More sophisticated • financial instruments Enhance investor and issuer awareness • Development of a culture and ability to manage compliance with covenants domestic swap curves • Ability for repos -securities borrowing and lending • Regulatory approval • processes for international issuers Linkages of domestic market with international markets (linking of exchanges, collateral management, and clearing systems) • Establish regulatory body to govern securities markets • • Restrict permissible investment for institutional investors Establish market standards (accounting, corporate governance) and regulations (insider trading laws) • More relaxed investment criteria for institutional investors (more non- government securities) • Better reflect international standards in regulations Legal system and enforcement • • Continue to relax investment criteria for institutional investors (allow to invest in other types of assets) • Refine regulations to adapt • Potential treaties to facilitate and govern cross- border capital flows Extend capital account liberalization • to more complicated market
 structure and instruments GEORGIAN STOCK EXCHANGE 21 June 2017 21 June 2017 Source: Oliver Wyman, World Economic Forum, Corporate Bond Market 2015 7 Equity instruments Equities, value traded, thousand GEL Equity market remains underdeveloped: • company owners are reluctant to give up their stake and seek other sources of financing • cost of equity is too high • and equities are riskier investment for mainstream investors (banks, pension funds, retail clients) Equities, number of trades 01.ივნ.17 On-Exchange OTC Share of On-Exchange trades in total (%) Source: GSE Number of equity issuers 2014 2015 2016 1 June, 2017 On-Exchange OTC 6 33 5 36 4 34 5 22 2014 2015 2016 01.ივნ.17 On-Exchange OTC Share of On-Exchange trades in total (%) Source: GSE Source: GSE GEORGIAN STOCK EXCHANGE 21 June 2017 21 June 2017 8 Bond instruments Bonds, value traded, thousand GEL 30 000 25 000 20 000 15 000 10 000 5 000 0 39% 20% 0% 89% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Bond market is currently more attractive for both issuers and investors: • bonds are similar to bank loans • cost of debt is lower • bonds are less risky investment for mainstream investors (banks, pension funds, retail clients).
• some bonds can be used by banks for getting refinancing loans from NBG which makes them attractive liquidity instrument 2014 2015 2016 01.ივნ.17 On-Exchange OTC Share of On-Exchange trades in total (%) Bonds, number of trades Source: GSE Number of bond issuers 2014 2015 2016 1 June, 2017 On-Exchange OTC 0 1 3 3 4 4 4 3 Source: GSE 01.ივნ.17 On-Exchange OTC Share of On-Exchange trades in total (%) GEORGIAN STOCK EXCHANGE 21 June 2017 21 June 2017 Source: GSE 9 Recent bond issuances: Eurobonds Eurobonds Issue Size Currency GOGC 250 mln USD Issue Date 26-Apr-16 Maturity Date 26-Apr-21 Tenor Coupon 5 Y Fixed GoG 500 mln USD 12-Apr-11 12-Apr-21 10 Y Fixed GR 500 mln USD 5-Jul-12 11-Jul-22 10 Y Fixed BGEO 350 mln USD 26-Jul-16 26-Jul-23 7 Y Fixed BOG 500 mln GEL 1-Jun-17 1-Jun-20 3 Y Fixed EBRD 120 mln GEL 24-Apr-17 24-Apr-22 5 Y Floating Issuer rating Fitch/S&P/Moody's BB-/B+/- BB-/BB-/Ba3 B+/B+/- BB-/-/B1 BB-/-/Ba3 AAA Coupon Rate 6.75% Listed on LSE 6.88% LSE 7.75% LSE 6.0% LSE 11.0% LSE 3 m GEL/CD/ NBG LSE GEORGIAN STOCK EXCHANGE 21 June 2017 Source: Bloomberg 10 Recent bond issuances: corporate Selected corporate issues Issue Size Currency GLC 10 mln USD Issue Date 22-Sep-14 Maturity Date 22-Sep-17 Tenor Coupon Issuer rating Fitch/S&P/Moody's Coupon Rate Listed on 3 Y Fixed - 8.75% GSE m2 Real Estate Nikora 25 mln USD 7-Oct-16 7-Oct-19 3 Y Fixed - 7.5% GSE 5 mln USD 18-Mar-16 18-Mar-18 2 Y Fixed - 11.0% GSE GWP 30 mln GEL 6-Dec-16 6-Dec-21 5 Y Floating BB- NBG Ref Rate + 3.5% - EVEX 15 mln USD 19-May-15 19-May-17 2 Y Fixed - 9.5% GSE Source: GSE GEORGIAN STOCK EXCHANGE 21 June 2017 11 Recent bond issuances: International IFIs issues Issue Size Currency Issue Date Maturity Date Tenor Coupon Issuer rating Fitch/S&P/Moody's Coupon Rate Listed on EBRD 25 mln GEL 13-Feb-15 13-Feb-18 3 Y Floating EBRD 107 mln GEL 17-Jun-16 11-Jun-21 5 Y Floating ADB 64 mln GEL 6-Jul-16 6-Jul-19 3 Y Floating ADB 100 mln GEL
 19-Feb-15 15-Feb-18 3 Y Floating IFC 108.3 mln GEL 1-Jun-17 1-Jun-20 3 Y Fixed BSTDB 48 mln GEL 5-Nov-15 1-Nov-18 3 Y Floating BSTDB 60 mln GEL 4-Aug-16 29-Jul-21 5 Y Floating AAA 3 m GEL/CD/ NBG + 20bps - AAA 3 m GEL/CD/ NBG GSE AAA 3 m GEL/CD/ NBG + 20bps - AAA 3 m GEL/CD/ NBG - AAA 7.99% - A2/A- 3 m GEL/CD/ NBG - A2/A- 3 m GEL/CD/ NBG - Government of Georgia GEL denominated government bonds: GEL 2.2 billion outstanding 1, 2 and 5-year Treasury Notes 10-year Treasury Bonds • Owned primarily by Georgian banks and large non-resident (7% of total ) institutional clients • Used by banks primarily for liquidity management purposes • Traded by primary dealers (banks) over the counter Source: GSE, MOF 12 GEORGIAN STOCK EXCHANGE 21 June 2017 Issuing bonds in foreign vs domestic currency Market: Currency International Domestic Foreign “hard” currency Local currency “floating” rate + Lower inflation risk + Lower currency risk (for foreign investors) + Greater information availability + Access to a wide set of issuers + Falls under international regulation which many cases is more investor friendly - Greater currency risk (for certain domestic issuers – those with limited international trade operations) + Exposure to issuers who cannot access international markets + No asset-liability currency mismatch (for domestic investors) - Greater currency risk (for foreign investors) - Higher inflation risk - Size of domestic issuances may not be sufficiently large for foreign investors to dedicate resources + Access to a wide set of investors, hence issuances are likely to be fully subscribed + Lower cost of financing (vs less liquid domestic market) - Asset-liability currency mismatch - More burdensome documentation process including requirements for internationally-recognized credit rating - More expensive issuance costs and longer execution time frame (avg.
10-12 weeks), particularly for first-time issuers + No asset-liability currency mismatch + Typically quicker execution (average 3-4 weeks) + Fewer financial disclosure/compliance requirements - Limited set of investors - Higher chances that issuances will not be fully subscribed - Higher cost of financing as investors demand greater risk and liquidity premium GEORGIAN STOCK EXCHANGE 21 June 2017 Source: World Economic Forum, Corporate Bond Market 2015 13 Key challenges: issuers and investors Factors impacting market Key challenges for issuers Key challenges for investors Ability to access Length and costly issuance process • • Burdensome corporate governance or reporting standards (companies either not sophisticated enough to comply with standards or reluctant to do so) • Burdensome regulatory approval process • Market not included in global benchmark indices • Difficulty for foreign investors to get to scale due to capacity and remoteness of the market • Underdeveloped asset management industry • Restrictions on investment criteria Risk of market framework • Concerns that issuing corporate bonds to banks will cannibalize the issuer’s bank lending rates • Volatile macroeconomic and political conditions (or history of) • Weak regulatory/legal framework • Inconsistent application or enforcement of the legal and regulatory framework • History of unexpected changes to policies • Limited standards around corporate governance Relative costs and returns • High cost of capital relative to other sources of debt financing, such as bank loans • High premium on primary market issuances due to perceived risks of the market framework or lack of secondary market liquidity • • Insufficient number and size of issuances to meet investor requirements Limited secondary market liquidity making it hard for investors to exit their positions without causing disruption to the market price • • Lack of intermediaries for market-making Lengthy transaction and execution time Ability to match supply and demand GEORGIAN STOCK EXCHANGE 21 June
 2017 • • • • Limited financial reporting Low transparency of market information Limited credibility of credit ratings Limited secondary market activity from which to base pricing of primary and secondary market offerings • Underdeveloped financial intermediation industry Source: World Economic Forum, Corporate Bond Market 2015 14 Regulation and legislation • Corporate governance and investor protection • Accounting and reporting standards • Securities market regulation GEORGIAN STOCK EXCHANGE 21 June 2017 21 June 2017 15 Regulation and legislation update Law on Entrepreneurs and Securities Market Law Corporate Governance, Accounting and Reporting Standards New standards on: • Independent board members and audit committee • Disclosure requirements for related party transactions and management compensation • Protection of minority investors • Corporate Governance standards are improving • Companies are required to publish annual reports • Annual reports need to be prepared according to IFRS • Capital markets development strategy approved by the government in 2016 GEORGIAN STOCK EXCHANGE 21 June 2017 16 SARAS and GSE: cooperation Is developing online reporting platform for financial statements Currently working on Memorandum of Understanding regarding cooperation related to reporting of listed companies Our common universe of companies: Public Interest Entity which are Accountable Enterprises listed on Stock Exchange Currently working on integration of GSE reporting platform for Accountable Enterprises listed on Stock Exchange into the SARAS reporting platform.
The aim is to create One Reporting Window for companies and simplify information submission Has developed sector specific/standard reporting platform for companies in A and B listing in 12 sectors /subsectors: Financial Statements • • Ratios • Operational data (disclosures) Held consultations with 24 companies in these sectors.
Have developed forms from investor perspective Disclosure and Corporate Governance support the development of capital markets and increase market liquidity • Corporate governance disclosure =reduced risks = increased market valuation and investor confidence • Uniform accounting standards improves comparability of companies across markets and countries = the use of information less costly for investors = lower cost of capital GEORGIAN STOCK EXCHANGE 21 June 2017 17 Social and macroeconomic policies • Pension and retirement policies • Tax regimes GEORGIAN STOCK EXCHANGE 21 June 2017 21 June 2017 18 Pension Reform: Pillar II System Pension reform highlights Pension reform design (current proposal): • Employees contribute 2% from their monthly salary to their individual pension account • Employers match this contribution by another 2% • Government matches with additional 2% contribution Estimated accumulation of pension fund assets, mln Lari Thus total monthly contribution will be 6% of employee’s gross salary Source: Ministry of Finance of Georgia, Ministry of Economy and Sustainable Development GEORGIAN STOCK EXCHANGE 21 June 2017 Source: Ministry of Economy and Sustainable Development of Georgia Significant funding source for domestic economy through debt and equity issuances (long-term GEL funding) 19 Information and rating providers • Risk assessment providers (rating agencies) GEORGIAN STOCK EXCHANGE 21 June 2017 21 June 2017 20 Credit rating How much difference a credit rating can make for a bond’s price/yield during the placement or after?
At least 50 basis points which translates into GEL 500k annual savings for a GEL 100 million bond issue To compare: cost of obtaining and maintaining credit rating is USD 25 - 50k annually GSE organized two roadshows for Fitch Ratings.

Met with approximately 20 large Georgian companies.
Some of them already hired Fitch and got rated (GWP: BB-, Silknet: B+, more in the pipeline) GEORGIAN STOCK EXCHANGE 21 June 2017 21 Infrastructure providers • Exchanges • Depositories/Custodians • Clearing and settlement system GEORGIAN STOCK EXCHANGE 21 June 2017 21 June 2017 22 New clearing and settlement system (1) DVP and FOP T+1 Primary NBG Payment System ATS (RTGS+ACH) (Interbank Payments) T+0 Secondary Bloomberg Government Bonds: • Primary Auctions • OTC (Secondary Market) • REPO Commercial Banks (Primary Dealers) NBG CSD Module (Settlement and Safekeeping of Government Bonds and NBG CDs) Commercial CSD (owned by GSE): • Equities • Corporate Bonds • Government Bonds • FX • Commodity futures Current Members • Banks • Brokerage Companies Bank Proprietary Account Client Omnibus Account Client Segregated Account GEORGIAN STOCK EXCHANGE 21 June 2017 Investment Funds New Members: • Pension Funds • -Hedge Funds -Mutual Funds • Wealth Management -Family Offices -HNWI (Qualified Institutional Buyers) • ICSD and Global Custodians (Clearstream, Euroclear, Citi, Deutsche, BNYM, State Street) Share Registrar • Issuer accounts • Nominee Accounts • Beneficial Owners’ Accounts • Accounts of ICSD and Global Custodians • Overall up to 500 000 accounts Pension Scheme Members: • More than 1 million personal accounts 23 New clearing and settlement system (2) Georgian Central Securities Depositary (GCSD) Share Registrar “Kavkasreestri” New system capabilities GEORGIAN STOCK EXCHANGE 21 June 2017 IPOs • Clearing and settlement of on-Exchange trades • OTC trades clearing and settlement • • REPOs (among GSE members and with NBG) • Margin Calculation • Guarantee Fund • Collateral Management • • Corporate Actions (Dividends, Coupon Securities Lending / Borrowing Payments, Stock Splits, Shareholders Meetings, etc.)
Tax services for investors • • Custody and safekeeping of local and foreign securities • Keeping records of securities of beneficial and nominal owners Transfer of securities, collateral and blocking • • Account/turnover statements, issuing ownership/title certificates • Holding and servicing individual accounts of pensioners • Recording Individual units of pension and mutual funds • Calculation of fund Net Asset Value for Asset Managers and Administrators • Reliable and independent source for market value of securities for Brokers and Asset Managers 24 New clearing and settlement system (3) Advantage Impact Clearing and settlement in Central Bank’s money Higher speed, lower operational risks and costs Better access to secondary market by institutional investors (including pension and mutual funds) Institutional investors will be able to trade and hold government securities though GSE and GCSD, thus increasing liquidity of government bond market New system advantages NBG and commercial banks will be able to conduct REPO operations using corporate bonds Reduced counterparty risk Access to foreign investors GEORGIAN STOCK EXCHANGE 21 June 2017 Corporate bonds will be accepted as collateral electronically, directly from market participants (banks, brokers, pension funds) in semi-automated manner Counterparty risk reduces for OTC trades as settlements will take place in DVP (Delivery vs Payment) mode Foreign investors will be able to hold Georgian corporate securities through Clearstream.
This will increase demand for Georgian securities and market liquidity 25 Issuing corporate bonds • • Is it the right time for Georgian companies to issue corporate bonds and in which currency?

Is it better to issue a bond or take a bank loan?
Interest rates on bank deposits dropped, making investments in bonds far more attractive Leading Georgian companies have matured for a public issue (good corporate governance, competent management, IFRS accounting and so forth), especially in GEL Banks are willing to buy corporate bonds, subject to NBG’s new REPO scheme eligibility Cost of obtaining international credit rating became more affordable International investors are increasingly seeking higher yield in prolonged historically low interest rate environment Get ready for pension reform to tap much larger and more liquid markets (larger issues, longer term, GEL denominated, lower rates) GEORGIAN STOCK EXCHANGE 21 June 2017 26 Thank you!
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