|
UKRAINIAN MONEY & FX MARKETS
Hryvnia continues to gather strength
The favorable situation for the Ukrainian hryvnia on the currency market remained in force throughout last week. On Friday, the Interbank FX Market closed at UAH/USD 8.088-8.122, with the hryvnia gaining 0.4% against the US dollar for the week. Since the start of November, the appreciation has amounted to 0.15%. At the same time, the National Bank of Ukraine has been refraining from making any interventions on the open currency market, limiting its activity to holding target auctions for individual borrowers. The NBU announced that, since early November, the volume of foreign currency inflow into Ukraine exceeded transfers abroad to non-residents. Thus, it appears that the start of the election campaign has not had an effect on the currency market.
Parliament sends 2010 budget back to the government
On Friday, November 20, the Ukrainian Parliament sent the draft law on the 2010 state budget back to the government for re-writing. MPs failed to support any of the proposals put forward by the parliamentary budget committee. According to the Budget Code, November 20 is the day when the draft budget law should have already been approved in the second reading. Thus, Ukraine is already significantly behind schedule in its budget process. This is not a new situation for Ukraine, where state budgets have, in many previous instances, received final approval just before New Year, much later than the December 1 date prescribed by the Budget Code. We do not rule out the possibility that the 2010 state budget will be approved even after the New Year or just subsequent to the presidential elections. There has already been a precedent, when the 2000 budget law was approved on February 17, 2000. Such a late approval of the state budget is rather convenient for the government as, in such cases, Ukrainian legislation requires limiting monthly fiscal expenditures by 1/12 of the previous year’s expenditures. Thus, the government should be able to save some money and to implement pre-electoral pork-barrel expenditures through ad hoc decisions. We expect that, in 2010, the consolidated budget deficit will amount to 6% of GDP, which should lead to the government’s continued active use of OVGZs to finance the budget.
UKRAINIAN EUROBONDS
Downslide continues for Ukrainian Eurobond market
In line with our expectations, the start of the presidential campaign has kicked off a period of high volatility in the Ukrainian Eurobond segment, creating a window of opportunity for purchases of sovereign debt. We expect that there will be no repeat of the events of winter-spring 2009, when yields on the short end of the curve exceeded 50% p.a. Nevertheless, the new yield level is also very attractive for purchases with a view to the growth in their value following the end of the presidential campaign.
The turbulence in the Ukrainian segment that began on Friday, November 13 continued throughout last week, giving rise to a panic-driven drop in quotations. As a result, last week, the EMBI+ Ukraine index spread expanded by 103 points (9%) to reach 1,216 points. The yield of sovereign bonds on the short end of the curve reached 16%, while the yield curve remains inverted. Speculation about the possibility of Ukrainian default has gotten investors stirred up, provoked by the situation surrounding Ukrzaliznytsia. We believe that there is no real justification for sovereign default to occur at this time. In 2010, Ukraine does not have any scheduled repayments of sovereign or quasi-sovereign Eurobonds and, just last week, Ukraine successfully enacted a coupon payment for a sovereign issue maturing in 2016. In the next few days, we expect that market players will reconsider Ukrzaliznytsia’s loan restructuring negotiations and realize that it won’t impact on sovereign debt, which should lead to a restoration of quotations.
Following suit with sovereign bonds, quotations for virtually all corporate issuers’ Eurobonds also plummeted. As in the case of government securities, the hardest hit were quotations on the short end of the curve, which has made many of these bonds notably attractive. In particular, the yield of Ukrsotsbank-10 rose 4.7 p.p. to 18.4%, and that of UkrSibbank-10 increased 2.5 p.p. to reach 12.2%. The only exception was Interpipe-10, the yield of which saw a 3.5 p.p. decline. At the same time, this bond remains fundamentally undervalued, with its yield currently standing at 42.4%. Among other issues, we continue to see quasi-sovereign Eurobond issues as the most attractive on the market.
MHP reports on 3Q09 financial results
MHP SA (Mironovsky Hleboprodukt) has once again confirmed its status as the most transparent and investor-loyal issuer in the Ukrainian Eurobond segment. Last Thursday, the Company issued its financial results for 3Q09 and 9M09 and carried out a conference call with analysts and investors. MHP’s financial results were fully in line with our expectations. The key development in 3Q09 was that MHP reached full capacity at phase two of its new poultry farm, boosting the Company’s monthly poultry output from 18,700 tonnes in January’09 to 27,500 tonnes in September’09. This came as no surprise to the market, however, as the Company previously issued such information in its operating results for 3Q09.
The Company continues to demonstrate a high level of solvency and profitability and we believe that its financial position is strong enough to service its debt. In terms of its 9M09 results, MHP posted a gross margin of 38.3% and an EBITDA margin of 38.2%. Its EBITDA/interest ratio is 5.4, which is a very solid level.
MHP-11 currently trade at a yield of 13.2%, which is significantly lower than the sovereign yield curve. The bond’s growth potential is limited by Ukrainian risks; however, we believe that, as the Ukrzaliznytsia-induced tension on the market eventually subsides, MHP Eurobonds will be one of the first corporate issues to enjoy price growth.
UKRAINIAN DOMESTIC BONDS
OVGZ market remains unchanged.
For the third consecutive auction, last OVGZ placement occurred without any notable demand on the part of market players. The total placement volume of the three standard bond series offered by the government (9-month, 12-month and 3-year bonds) was only UAH 2.7m. In line with our expectations, demand for these three series, with yields of 19%-20%, was minimal. Supporting the facade of a successful auction was the ad hoc placement of special OVGZ for financing the EURO-2012 soccer championship. They accounted for more that 99% of the bonds sold, at UAH 320m of the total UAH 322.8m placed. Of the two bid applications submitted, both were satisfied. However, this demand was more than likely ‘formed’ in an agreement between the government and one of the state-owned banks, as these particular government bonds have not seen any demand over the past month and there are no fundamental prerequisites causing the situation to change. We maintain our perspective that OVGZs with yields lower than 23%-25% are of no interest to market players. Therefore, we continue not recommending investors to place bids for lower yield levels.
Ukrainian corporate bond market heads to court
While there are few corporate securities still remaining on the market and market conditions are still not feasible for initial placements, the courtroom has become an eventful place for market-related developments. The incomplete restructuring of Ukrgazbank bonds should lead to court proceedings, initiated by the Bank’s bondholders. If this case actually leads to the courtroom, we believe that the outcome of proceedings will compromise the terms of the bonds’ restructuring. Ukrgazbank should be forced to make concessions in connection with the fact that the unresolved issue of its debt on bonds disallows the Bank to operate on the interbank credit market.
At the same time, the situation surrounding the Cherkasy Poultry Plant continues to worsen and we expect that bondholders will not gain a clear picture of what is really happening in the near future. The Company is challenging the court's decision to declare it as bankrupt, claiming that the ruling is illegitimate. We do not rule out the possibility that a higher court will rule in support of the Company and that the bankruptcy process will be suspended. At the same time, we think that investors should not bear any optimistic expectations regarding the court’s decision and thus, we recommend that bondholders pursue their claims against the Company in a timely manner.
To receive additional information, please contact:
Yuval Shavit
Communications Director
Astrum Investment Management
Mob.: +380 (67) 236 46 73
www.astrum.ua
|
