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UKRAINIAN MONEY & FX MARKETS
Yushchenko signs law, IMF upset, S&P lowers outlook
Last week, President Yushchenko signed the law that significantly increases the minimum wage and subsistence level. He also said he would submit a bill suggesting changes to the 2009 state budget to the Ukrainian Parliament to secure resources for financing the increased outlays. According to our estimates, the new law will require at least UAH 3.5bln in extra expenditures from the 2009 budget and will increase 2010 state expenditures by at least UAH 55bln above those in the draft 2010 state budget prepared by the government. This law has already provoked overt criticism on the part of the IMF, whose main message before its mission’s departure last Monday was that law’s signing jeopardizes the progress of negotiations on the fourth tranche. We maintain our assumption that the IMF fourth tranche of SDR 2.5bln (USD 4bln) will be postponed to 2010, thereby increasing pressure on the state budget in November-December’09. This will mean increased pressure on the NBU to finance the deficit, take cash from state-owned companies, and increase tax pressure on other businesses.
The Standard & Poor's rating agency promptly responded to the president’s move by downgrading Ukraine's rating outlook from positive to stable. At the same time, the agency affirmed its CCC+/C long- and short-term foreign currency sovereign credit ratings for Ukraine. The reduction in the rating is based on renewed political uncertainty. The agency has acknowledged the fact that the political events now unfolding in Ukraine are influencing the fulfillment of conditions of the IMF stand-by program, thus increasing the probability of the next tranche’s postponement.
Hryvnia continues to hold its ground
The hryvnia ended last week at UAH/USD 8.099-8.1125. By week-end, the hryvnia had gained 0.5% against the dollar, while it had gradually gained 1.8% against the greenback in October. The national currency’s relative stability led to some changes in the rules of target auctions for individual borrowers. At last week's auction, the NBU already applied the new policy. Unlike in the past, when the rate was fixed for all bidders, this auction had a real auction format, where bidders could buy dollars at the rate they asked from the NBU, with the cut-off floor rate of UAH/USD 8.10. The weighted average rate was UAH/USD 8.1505, which was virtually the same as the retail market rate for individual borrowers to repay foreign currency loans.
In our view, this might mean that the NBU is exploring an “exit strategy” from the instrument of target auctions as an attempt to save its international reserves. We look positively on the NBU’s serious approach in economizing its reserves, especially given the fact that, in 2009, they will likely not be replenished by IMF funds. At the same time, it should be noted that foreign currency auctions have eventually become one of the major factors in stabilizing the FX market and limiting the deterioration of the quality of Ukrainian banks’ assets. Given that the launch of active campaigning for the presidential election may bring volatility to the FX market, the currency auctions held by the NBU are managing to restrain panic on the retail currency market.
UKRAINIAN EUROBONDS
Sell-off in Ukrainian Eurobond segment
Last week was one of the worst for the Ukrainian debt market in the last few months. The main factors influencing price dynamics in the Ukrainian Eurobond segment, which we outlined last week, have resulted in notable negatives. The external environment was unfavorable, effectively reducing investors’ appetite for risk. At the same time, negotiations with the IMF were exacerbated by the fact that the president signed the law on improving social standards. Growing political tensions, in connection with with start of the official election campaign period in Ukraine, have already impacted on negotiations with the IMF. In turn, this has resulted in Standard & Poor’s lowering its forecast for Ukraine from positive to stable, sending yet another negative signal to investors. As a result, last week, the EMBI+ Ukraine index spread widened by 144 points (16%) to 1017 points.
All sovereign and quasi-sovereign securities underwent a decline in prices. An increase in yields was most remarkable on the short end of the curve. The yield of Ukraine-11 once again drew close to 13% p.a., returning the yield curve for Ukrainian sovereign Eurobonds to an inverted form. Among first-tier banks, the only Eurobond that grew was UkrSibbank-11. The prices of Eurobonds from other high-quality banks declined slightly. The corporate segment fared noticeably better. Interpipe-10’s yield fell by 6.5 p.p. to 43.7% p.a. and MHP's Eurobond also somewhat decreased. We see no reason for optimism in the Ukrainian Eurobond segment in the near future and believe that purchases of Ukrainian debt should recommence only after the situation on world markets improves.
Naftogaz postpones new Eurobond issue
The date of the new issue of Naftogaz Eurobonds’ issue has been postponed to November, 5, 2009. The Company did not disclose the reasons for the delay, though we think it is due to technical hang-ups in preparations. We expect that the Company will not encounter any problems that could derail the debt restructuring process. We maintain our view on the new Naftogaz Eurobonds, as the issuer’s creditworthiness is defined by a state guarantee. This permits determining the new bonds’ price 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 decrease pressure on the sovereign curve. Once a state guarantee for the bonds is fixed, their spread to the sovereign curve should drop 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.
Bank Forum redeems Eurobonds, Alfa Bank pays on coupon
On Friday, October 30, Bank Forum redeemed Eurobonds for a total amount of USD 100m. This occurrence is in line with market expectations and we think it should not have a significant effect on the prices of Ukrainian sovereign bonds. We expect this news has some potential to produce a positive effect on first-tier banks’ Eurobonds. At the same time, we do not expect the growth in quotations to be immediate due to the negative external market background.
At the same time, on October 30, Alfa Bank (Ukraine) successfully implemented a coupon payment on its Eurobonds. The key point of interest in this regards is the fact that, following this coupon payment, Alfa-Bank (Ukraine) merged three of its Eurobond issues into one, worth USD 840m in total. In effect, this move formally completes the restructuring of the debt owed by Alfa Bank (Ukraine).
UKRAINIAN DOMESTIC BONDS
The point of peak OVGZ yields has passed
On Thursday, October 27, the Ministry of Finance placed OVGZs for a total amount of UAH 1.25bln (UAH 1.4bln par value). Among the five existing series of bonds, MinFin placed four series. There was no demand for special OVGZs provided for Euro-2012 financing. More than 58% of the placed bonds (UAH 827m) were accounted for by 6-month OVGZ, redeemable in April’10. The threshold level of these bond yields was 29.5%, and the weighted average of the 6-month bond yields was 27.95%. Among the 65 bid applications, MinFin left only one unsatisfied.
In line with our expectations, the government provided an unprecedented yield level to be able to refinance short-term OVGZs placed earlier. We expect that such high yields will not repeat during placements in November, that primary yields will decline to 23%, and that the placement volumes will be significantly lower. As a result of the last few auctions, the government has essentially created another peak period for redemptions, which will take place in April’10. At that time, MinFin will have to redeem OVGZs for a total amount of UAH 2.5bln over 14 days. At the same time, we believe that the volume of public debt remains under control, as its share traded on the market is below 25% or less than UAH 20bln. Thus, in 2010, the market should not witness any defaults with respect to domestic debt.
On Friday, October 30, MinFin held an ad hoc OVGZ placement, intended to attract funds for financing healthcare measures regarding the A/H1N1 virus in Ukraine. The government offered bonds with maturity periods of 11, 24 and 34 months. However, there was no demand at the auction. We think that the auction results do not necessarily reflect the current situation on the market. We mainly attribute these poor results to the fact that this auction was announced without enough advance notice and the timing of the event on the last day of the month. Especially this latter factor led players in the banking sector to ignore the auction. Thus, we await players’ return at the next OVGZ placement on Tuesday, when the government will offer 6-month bonds (redeemable on May 12, 2010), 9-month bonds (September 15, 2010), and 3-year bonds (October 31, 2012).
Citycom disgruntles bondholders with lame offer.
Last week, a meeting took place between the management of Citycom and its creditors, including holders of its domestic bonds. There are currently two series of Citycom bonds still in circulation on the Ukrainian domestic bonds market, for a cumulative total of UAH 100m. However, the Company has been in a state of default for one of its bond series, in the amount of UAH 50m, since January’09. There is still no official information available on the terms of restructuring. According to reports published by the press, Citicom has proposed rather disloyal terms for the debt’s repayment, which entail paying back 10% of its debt payable over a period of ten years. Such conditions are unprecedented for the Ukrainian market and are unlikely to go over well with the bondholders. At the same time, debtholders’ possibilities are now limited, and the situation is compounded by an apparent conflict between the Company’s owners. As a result, we think that Citicom will encounter default with respect to both of its issues.
To receive additional information, please contact:
Yuval Shavit
Communications Director
Astrum Investment Management
Mob.: +380 (67) 236 46 73
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