Bond Market Insight-Concern Galnaftogaz: Valuation currently limited to market pricing of convertible, but 29% upside seen beyond put option

Concern Galnaftogaz (GNG) made public its 9M09 IFRS financials last December, revealing a continuing trend of better margins and cash flow. Earnings-based leverage ratios did recover over the reported period. The European Bank for Reconstruction and Development’s (EBRD) US$20m equity investment in GNG in 4Q09 is likely to improve balance-sheet leverage ratios. An additional injection of US$30m by EBRD in 2010 should strengthen GNG’s balance sheet further. Our assessment of the current pricing of the US-dollar note, which is issued by company’s parent entity, showed there is little value in this investment if it is viewed as a short-term play and its put option is executed this November. More value will accrue if such an investment lives beyond its put option date, when the principal redemption arrives along with the premium: fair value of the note provides a 29% price upside, in our view.