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UKRAINIAN MONEY & FX MARKETS
Hryvnia undergoes slight depreciation
Last week, the hryvnia lost 0.7% against the dollar, closing on Friday at UAH/USD 8.1495-8.1610. After falling earlier in the week, the hryvnia grew slightly on Friday as the market reacted to news that the Ukrainian Parliament had passed a law that, among other things, obliges exporters to return their FX receipts to Ukraine in 90 days instead of the current 180-day period. This means there will be less opportunity for exporters to abstain from selling foreign currency during devaluation periods. At present, the market is still waiting for the verdict of the International Monetary Fund’s mission after its finishes its work in Kyiv. In these regards, last weekend, the IMF announced that it requires the President to veto a law that would increase the minimum wage and subsistence level in Ukraine. While the decision on the fourth tranche’s allocation remains unknown and with few significant exchange rate movement factors in Ukraine, the exchange rate should be largely determined by secondary factors: the Russian FX market, the influx of foreign currency with the onset of the active stage of the presidentiall campaign, and Prominvestbank’s selling USD 500m it received as a capital increase.
Current account turns positive in September
According to the NBU's preliminary estimates, the current account turned positive in September, with a surplus of USD 97m, while the financial account deficit amounted to USD 1.4bln. September’s current account figures are in line with our expectations. Foreign trade was balanced, with the balance of trade in goods and services close to zero. There were no loan disbursements from the IMF in October, so the financial account gap that month corresponds to the applied statistical methodologies (for more detail on BoP methodology with regard to IMF financing, see Astrum Daily of September 23). The accumulated 9M09 current account deficit stands at USD 1bln and the 9M09 financial account deficit is USD 5.1bln (USD 11.2bln, if excluding the IMF loan tranches received in 2009). Net FDI in September stood at USD 835m, supported by a USD 500m capital injection into Prominvestbank. With accumulated 9M09 net FDI inflows at USD 3.3bln, this development is in line with our forecast for total FDI inflows in 2009 at USD 4bln. We expect that the current account will maintain a surplus in 4Q09 and we reiterate our current account deficit forecast for 2009 at USD 0.5bln (0.4% of GDP).
Ukrainian government postpones pension reform again
The Cabinet of Ministers has published its Order № 1224 of October 14, which approves the Concepts of Handling Pension Reform in Ukraine. This document envisages postponing the reform of the pension system to 2014-17. This document is, in fact, another postponement of pension reform, as the previous plan envisaged 2008-2009 as the best time for introducing a second tier to the pension system. This publication of this document at this particular time is likely an initiative to show the IMF some “progress” in terms of pension reform, as envisaged by the Ukraine-IMF Memorandum. Postponing the pension system’s reform means that Ukraine will also be delaying the development of a strong domestic investor. This development diminishes the likelihood that long-term UAH-denominated debt instruments will appear in Ukraine before 2017. This should, in effect, impede the development of the domestic debt market and force corporations and banks to seek credit from foreign lenders rather than domestically.
UKRAINIAN EUROBONDS
Buying frenzy reaches first-tier Eurobonds
The sovereign segment of the Ukrainian Eurobond market refrained from any sharp movements last week. After the recent rapid growth inevitably came to a lull, which a number of players used to lock in profits. As a result, bond prices in the sovereign sub-segment saw a slight adjustment downwards, and the yield of Ukraine-11 once again grew to above 11% p.a.
At the same time, the spread for the EMBI+ Ukraine index narrowed to 14 points over the week, closing at 873 points on Friday. The spread narrowed on the back of positive growth dynamics in the quasi-sovereign segment. In line with our expectations, after sovereign securities’ rapid growth, investors' attention shifted to first-tier Eurobonds. By the week’s end, virtually all quasi-sovereign Eurobonds (City of Kyiv, Ukreximbank) grew in prices, while gains also extended to the most reliable issuers in the banking and non-financial sectors. Alfa Bank-12 enjoyed the most remarkable growth. As we noted last week, this Bank’s Eurobonds are among the most undervalued among high-quality securities. Despite a 3.1 p.p. reduction in its yield to 16.4%, we still view Alfa Bank-12 as undervalued. However, we do not rule out a small correction for these bonds as a result of profit-taking by some investors. The yield for Azovstal Eurobonds also significantly declined, by 1.2 p.p. to 14.2%.
Among Eurobonds, only Bank Pivdenniy-10 underwent a substantial drop in value. Due to the rapid growth in this bond’s quotations over the past few months, this issue appears to be somewhat overbought. The yield for Pivdenniy-10 is currently 20.5%, and we do not see any considerable potential for its price to grow. Pryvatbank-12 and InterPipe-10 still number among our favorites, and we also see ample growth potential with respect to FUIB Eurobonds.
This week, movements on the sovereign curve should be largely determined by external factors and the progress of negotiations with the IMF mission. Furthermore, on October 30, Bank Forum should redeem Eurobonds totaling USD 100m. We expect that the Bank will not have any problems fulfilling its obligations. This repayment should become a catalyst for the active buying of Eurobonds issued by first-tier banks (namely UkrSibbank, Ukrsotsbank and Ukreximbank), which should bring about a lowering of their Eurobonds’ yields.
Naftogaz Eurobonds restructuring finally approved, Fitch quick to react
In line with our expectations, on October 19, 93% of Naftogaz Eurobond holders approved the restructuring terms. As a result of the restructuring’s finalization, new Naftogaz Eurobonds with a 5-year maturity and 9.5% coupon rate, will be in circulation as of next week. The volume of the new issue will increase due to the addition of the restructured bank loans. The issue's total amount is set at UAH 1.6bln, which will make Naftogaz Eurobonds the most liquid in the Ukrainian Eurobond segment. The issuer’s creditworthiness is defined by the existence of a state guarantee, which permits determining the price of the new bond on the basis of quotations for sovereign bonds, with a spread that demonstrates the level of investors’ trust in this state guarantee.
We recommend that investors BUY Naftogaz Eurobonds at 85%-87% par value. We expect that the completion of the restructuring will squeeze Naftogaz Eurobonds spread to the sovereign curve to 50-100 b.p. As a result, we expect that the price of Naftogaz Eurobonds will grow to 90% par value in 1-2 months’ time. This is in line with our expectations that the finalization of the Company’s external debt restructuring would lead to an improvement in Naftogaz’s ratings. The high level of bureaucracy associated with agencies’ ratings methodologies creates a time lag before a ratings upgrade is finally awarded. The first move in this direction is typically an improvement in the ratings outlook. On October 21, the Fitch international rating agency increased its ‘Rating Watch’ rating for Naftogaz from "developing" to "positive". We expect that the rating upgrade by Fitch will be the first in a series of steps by rating agencies that will lead to the recovery of Naftogaz’s ratings. Thus, we expect a similar move on the part of Moody's in the near future.
UKRAINIAN DOMESTIC BONDS
The age of maximum yields on primary OVGZ market has come
On Tuesday, October 20, the Ministry of Finance placed three OVGZ series for a total amount of UAH 453m. More than 50% of the placed bonds were 9-month OVGZs that sold for UAH 241m in total. The weighted average of 6-month bond yields was 24.5%, and the threshold level of these yields was 27%. There was no demand for the special OVGZs issued for financing the Euro-2012 preparation program.
This auction fixed yields at a new higher level. In line with our expectations, demand from banks declined on the back of a liquidity squeeze in the banking system. As a result, only 19 bids were submitted, of which the government satisfied 16. The total volume of the bids was just UAH 660m, 50% lower that the volume at the previous auction. MinFin satisfied the maximum number of applications, demonstrating its current high need for funding. Only one application for each OVGZ series went unsatisfied, the yield for which exceeded the threshold level by 1 p.p.
The last two auctions have essentially fixed a new yield level all along the curve and we expect MinFin will have to use these levels as guidelines in the face of pressure to refinance its debts – at least for this week, as the government has to redeem OVGZs for a total amount of UAH 1.1bln and needs to raise up to UAH 1bln in order to refinance its debt.
At the OVGZ placement on October 27, the government plans to offer bonds maturing on April 28, 2010 (6-month bonds), June 16, 2010 (8-month bonds) and October 12, 2012 (3-year bonds), in addition to the special Euro-2012 target OVGZs. The government hopes to attract much-needed funds by offering two series of short bonds (we expect the greatest demand for 6-month bonds) and thanks to the banking system’s higher liquidity, as correspondent accounts’ balance grew by UAH 1.4bln since the previous auction to reach UAH 15.1bln last Friday. Thus, we expect that demand at the October 27 auction will exceed the level of demand seen for last week’s placement. At the same time, we assume that the growth of liquidity has not been even across the board, capacitating some banks more than others in terms of their ability to purchase OVGZ. We recommend that investors take advantage of the situation by bidding at the 26%-27% level on the short end of the curve. We expect that the primary market yield will begin to decline as of next week once the critical point regarding the OVGZ redemptions has passed, as the next OVGZ series will only be redeemed at the end of December’09.
Headway made in developing infrastructure for Ukraine’s bond market
Last week brought progress with respect to several initiatives aimed at developing the Ukrainian bond market. Parliament registered bill 5157 on amending the Law of Ukraine "On securities and the stock market". This bill proposes extending the circulation period and redemption of a given bond in instances where its issuer has bought back the entire issue or in the case that all bondholders consent to extending such terms. The lack of proper regulation of such issues became apparent in 2009 in connection with the overwhelming presentation of bonds for their put option and the substantial number of bond restructurings.
In a separate development, Ukraine’s SEC, the SSMSC, released a draft decision that implies changes in the reporting mechanism for issuers. According to the document, as of January 1, 2010, all issuers listing bonds on Ukrainian stock exchanges must publish their quarterly and annual reports. In addition, they will have to enter specific information in an electronic integrated information disclosure system (ESKRIN). We expect that the data to be provided by issuers will expand the range of information provided to the SSMSC, thereby enabling a more comprehensive analysis of the reliability of individual borrowers.
To receive additional information, please contact:
Yuval Shavit
Communications Director
Astrum Investment Management
Mob.: +380 (67) 236 46 73
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