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UKRAINIAN MONEY & FX MARKETS
Volatile period for the hryvnia
Last week, the hryvnia closed at UAH/USD 8.4820-8.5040, losing 0.6% against the greenback for the week. At the same time, there is remarkably high volatility on the Interbank FX Market. Towards the end of 3Q09, the national currency strengthened significantly, reaching UAH/USD 8.25 as banks sought to meet NBU standards regarding its FX position. However, in the first two days of October, the hryvnia resumed its downward spiral and fell by 2,8%. The National Bank continues to hold its regular auctions, providing individual borrowers with relatively cheap foreign currency, which is essentially curbing deterioration in the quality of banks’ portfolios and panic on the retail FX market.
Public debt in August: domestic bonds in, Eurobonds out
The Ministry of Finance reported that total public debt, which is direct state debt plus guaranteed debt, stood at UAH 280.5bln at the end of August, up 9.5% m/m. Direct state debt grew 11% m/m to UAH 205.4bln, while guaranteed debt increased by 5.6% m/m to reach UAH 75.1bln by the end of August. Most of the increase in public debt in August was associated with the UAH 18.6bln capital injection into Naftogaz, made through the issuance of state domestic bonds (OVGZ). At the same time, external direct state debt decreased by 2.2% m/m in USD terms, to reach USD 15.4bln, due to the redemption of USD 500m in Eurobonds. However, external direct public debt still grew in UAH terms, by 1.5% m/m. This was associated with a change in the official NBU exchange rate from UAH/USD 7.6980 to UAH/USD 7.9890 at the end of August, which corresponds to a 3.6% official exchange rate devaluation in August. Currently, direct public debt stands at 21.8% of our estimate for 2009 GDP. We expect that it will continue growing to reach 23% of GDP by the end of 2009.
Auction for Odessa Port Plant unsuccessful
Last week, the State Property Fund held an auction to privatize the 99.6% stake in the Odessa Port Plant (OPP). Only three companies took part in the auction – Nortima (affiliated with Igor Kolomoyskyi), Azot Servis (affiliated with Sibur), and Frunze Flora. The final price offered by Nortima was UAH 5bln (USD 625m). Nevertheless, the Auction Committee refused to approve the results of the auction since they believe that the final price was below the fair value for OPP. According the government, the fair value is at least USD 1bln. The SPF announced that the price for the stake should be in the range of UAH 8-10bln. Thus, the government failed to attract funds from privatization to finance the budget deficit. We estimate the total amount of privatization revenues will amount to UAH 2bln in 2009. Failure of the OPP privatization is negative for the hryvnia, because FX revenues from the auction could otherwise help support the national currency. Nevertheless, we do not rule out the possibility that Nortima will submit a court claim regarding the purchase of the OPP stake based on the results of this auction. We expect that the fate of the plant will become clear only after the presidential elections.
UKRAINIAN EUROBONDS
Naftogaz: restructuring talks in full swing
Last week, the restructuring of Naftogaz Eurobonds continued to impact on the Ukrainian Eurobond segment. As of September 30, the Company had not repaid the principal of the Eurobonds issue, although it did pay out the coupon . As a result, the Fitch international rating agency downgraded Naftogaz’s rating from C to RD (Restricted Default) and placed the rating in the Rating Watch. At the same time, Fitch confirmed the rating for Naftogaz Eurobonds, worth USD 500m, at the C level. We also expect that Moody’s will also downgrade Naftogaz’s rating in the near future. The rating downgrade was an unavoidable and formal step on the Fitch’s part, despite the fact that the majority of Naftogaz Eurobond holders are ready to take part in the restructuring.
We expect that the Naftogaz ratings will be restored once the bonds’ restructuring has been completed. At the moment, we see a high degree of probability that more than 75% of the bondholders will accept Naftogaz’s restructuring terms. At the same time, Naftogaz’s bilateral creditors (Deutsche Bank, Credit Suisse, and Depfa) have agreed on the restructuring of their loans to Naftogaz and to exchanging them for new Naftogaz Eurobonds. The new Eurobond issue should amount to USD 1.65bln. As a result, the Naftogaz issue will be the largest in the Ukrainian Eurobond segment, which will provide considerable liquidity and thus may become one of the most popular debt instruments among investors in Ukrainian Eurobonds. This will contribute to narrowing this bond’s spread to the sovereign curve, which, in our opinion, should be impacted by the discordance between the "sovereign guarantees" given by the government to Naftogaz and the status held by sovereign bonds.
Ukrainian Eurobonds pressured by external negativity.
Last week, the Ukrainian Eurobond segment felt pressure from two key factors: negative tendencies on global markets and Naftogaz Eurobonds restructuring. The correction on global stock markets did not allow for the growth of investors’ appetite for risk and even led to the sale of government debt of developing countries, including Ukraine. By the week’s end, the EMBI+ Global index spread was equal to 339 points, having widened by 7 points (2.1%) during the week. The EMBI+ Ukraine index spread widened by 42 points (or 4.8%) to reach 910 points. Price quotations on the short end of the curve declined the most and the curve once again become inverted. The yield for Ukraine-11 rose by 5.7 p.p. to 17%, which, in our opinion, makes this issue extremely attractive for investors. An exception was Ukraine-13, whose value increased only slightly last week. The situation surrounding Naftogaz Eurobonds contributed to the quick decline for Ukrainian Eurobonds. We continue to believe that Ukrainian spreads are unjustifiably wide and we expect that they will narrow once the situation with Naftogaz’s debt restructuring is resolved.
Yields for most issuers in the financial and corporate segments also grew. The exceptions among first-tier bank issurs were Ukrsotsbank-10 and Ukreximbank-12, which we have previously identified as being undervalued. At the same time, the yield for UkrSibbank-10, the most expensive Eurobond in the Ukrainian segment, grew to surpass the 10% mark. The only corporate Eurobond that demonstrated positive momentum was Interpipe-10, the yield for which dropped by 3 p.p. to 43.64%. In our view, the issue’s spread to the sovereign curve continues to be unfairly wide and its dynamics indicate that investors are once again paying attention to this undervalued asset.
UKRAINIAN DOMESTIC BONDS
OVGZ placement results meet expectations
On Tuesday, September 29, the Ministry of Finance placed OVGZ for a total amount of UAH 228.5m, offering government bonds with a maturity period of 9 months, 12 months and 3 years. The results of the auction were completely in line with our expectations. The main demand was on the short end of the curve and 9-month OVGZ were sold for a total of UAH 164m (at face value), or 72% of the total placement. The government kept the threshold level of bond yields unchanged at 22%-23%, which limited the interest of potential buyers.
This week, the government will again be placing OVGZ and, in the meantime, the institution of primary dealers is still not operating, so anyone can participate as buyers at this point. This week, in addition to the traditional auction, the government also intends to offer the market special OVGZs, issued with the target purpose of financing Euro-2012.
Centravis: bad news on duty fees, good news on EBRD funds
On September 28, the Russian government announced the introduction of a special 28.1% import duty on non-corrodable steel tubes with an outside diameter less than 426 mm. This duty will affect tubes manufactured by the Сentravis holding. Exports to Russia account for 35% of Сentravis’ total revenues. We expect that the imposition of this duty will have a negative effect on Сentravis’ financials; however, the impact should not be critical for the Company’s solvency. Сentavis-produced tubes are in the high margin segment and the Company should have the possibility to decrease its prices in order to maintain a high level of competitiveness. Moreover, the hryvnia’s devaluation exceeded the devaluation of the ruble in 2008-09, which gives Сentravis an additional competitive advantage.
There is additional positive news regarding this issuer, as the EBRD approved a financing package for Centravis, which consists of two parts: equity investment amounting to EUR 10m and a syndicated loan worth EUR 48m. The provision of these funds should improve the Company’s financial sustainability and allow it to complete its modernization program. As a result, we maintain our view that Сentravis is one of the most reliable borrowers on the domestic debt market and we expect that the Company’s bonds will be among the first to enjoy demand in 2010. The coupon rate of the bond for the next year of circulation is 23%.
TMM successfully redeems bond issue
On October 2, TMM fully repaid its bond issue, which came to a total of UAH 180m. The bonds that remain in circulation are valued at UAH 150m, and they have already been bought back by the issuer. We view this latest news positively, as this development demonstrates the Company’s high level of solvency and its loyalty to bondholders. As a result, TMM has been added to a short list of bond issuers in the corporate segment that have, during the current crisis, successfully managed to fulfill the obligations to redeem their respective bonds.
To receive additional information, please contact:
Yuval Shavit
Communications Director
Astrum Investment Management
Mob.: +380 (67) 236 46 73
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