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Ukraine Markets Daily (May 19, 2016)

Market news 

  • The Ukrainian Government adopted the privatization terms for the Odesa Port Plan
  • The IMF anticipates the completion of the second EFF review by July 2016
  • Moody’s downgrades DTEK default probability to D-PD, affirms DTEK 2018 notes at Ca

Market comment

The UX Index was up by 1.5% in UAH terms on Wednesday, and up by 1.4% in USD terms. The PFTS Index was up by 0.4% in UAH terms. Four out of seven stocks in the UX Index were up on Wednesday, with the largest increase recorded for CentrEnergo (3.0%), Ukrnafta (1.9%) and DonbassEnergo (1.7%). 

 

On the interbank exchange market, the USD/UAH was down by 0.1% to 25.24 (mid price) on Wednesday, according to Bloomberg. The official exchange rate reported by the NBU was UAH 25.26.

 

The Ukrainian Government adopted the privatization terms for the Odesa Port Plan

The Ukrainian government has approved the privatization terms for a 99.6% stake in one of Ukraine's largest chemical producers Odesa Portside Chemical Plant (OPP), with the starting offer set at UAH 13.175 bn (USD 571 mn), according to a Government’s statement.

"All preparatory works for the privatization of the plant have been completed. After an independent assessment of the state-owned shares of the OPP, the privatization commission set a starting price at 13.175 billion Hryvnyas (about USD 521 mn)," Igor Bilous, the head of the State Property Fund, told a cabinet meeting. Ahead of the privatization tender, the OPP underwent an international audit, according to the Economy Ministry. The company's financial statements were drafted in line with the international standards, while it will undergo an international ecological audit shortly.

Under the terms of the sale, the buyer should maintain the company's basic range of products, operations and services. The plant should be able to continue accepting, storing and shipping ammonia and other chemical products delivered through pipelines or by rail. No infringement of the interests of economic entities which are the company's contractors shall be allowed. And the company must honor the existing contracts on the delivery of fertilizers.

The sale of OPP will take place at an open auction, on condition that at least two potential buyers, one of which is a non-resident of Ukraine, submit bids, the head of the State Property Fund Igor Bilous said. Norway's Yara, the U.S.-based IBE Trade, Koch Fertilizers, CF Industries, and a Polish company Ciech, are among the prospective buyers of the Odesa Portside Chemical Plant, the official announced earlier.

According to UBS, which provides consulting services regarding the privatization process, the value of the plant is estimated in the range of USD 400 mn and USD 700 mn, though the final price depends upon the situation on commodity markets, the political situation, and the transparency of the sales process.

“The adoption of the requirements towards prospective buyers of the OPP is a historical event. It marks, not only the launch of the privatization of the enterprise, but of the large scale privatization in Ukraine generally”, the First Deputy Prime, Ukraine’s Minister of Economy and Trade Stepan Kubiv says.

The OPP produces about 1 million tons of ammonia and about 800,000 tons of carbamide annually and exports chemicals to more than 30 countries. The government owns 99.6 percent of shares of the plant.

Our view: the news is POSITIVE, opening a new chapter in the country’s privatization policy. Notwithstanding the Government affirmation, however, we think that the controversy around the debt of the company to the Ukrainian businessman Dmytry Firtash will negatively affect the result of the sale. In the meantime, in our view, the Government failed to present a confident privatization roadmap for 2016, which may result in weakening the trust in the privatization policy.

 

The IMF anticipates the completion of the second EFF review by July 2016

The IMF mission to Kyiv reached a staff level agreement with the Ukrainian authorities on policies needed to complete the second review under the EFF, subject to approval by IMF management and the Executive Board, according to a statement of the International Institution release on May 18, 2016, on completion of the visit of the IMF mission to Kyiv in May 10-18, 2016, headed by Ron van Rooden, mission chief for Ukraine.

The IMF acknowledges the achievements of the country in restoring macroeconomic stability, notwithstanding the difficult circumstances of the past year. As a following step, the International institution stresses the critical need for structural and institutional reforms aimed at turning the recent recovery into strong and sustainable growth, while pointing at the fight against corruption as ‘a litmus test for the government’s ability to retain broad domestic and international support for its policies’. In this connection the IMF emphasizes the importance of boosting the authorities’ efforts to ‘entrench fiscal and financial stability, decisively enhance transparency and the rule of law, and reform the large and inefficient state-owned enterprise sector’. “The implementation of strong measures in these areas will pave the way for the IMF Executive Board’s consideration of the review, expected in July 2016”, Ron van Rooden emphasized.

Our view: the news is POSITIVE, sending signal about the resumption of the country’s cooperation with the IMF, and therefore confirming the Government’s resoluteness to reform. In the meantime, we still see the ‘Devil in the details’. A positive decision of the IMF Board on the program, and therefore the resumption of the IMF financing is conditional upon upfront actions by the Government in the several coming weeks, which in their turn are critically dependent upon the ability of the poorly structured Parliament to mobilize around the dozens of law to be adopted in execution of the program memorandum. 

 

Moody’s downgrades DTEK default probability to D-PD, affirms DTEK 2018 notes at Ca

On May 18, 2016, Moody's Investor Service (Moody's, or the Rating Agency) downgraded the probability of default rating of DTEK ENERGY B.V (DTEK, or the company) to D-PD (Default on all long-term debt obligations) from Ca-PD, while at the same time affirming the company’s corporate family rating (CFR) Ca rating and also the Ca rating of DTEK Finance Plc's  USD 750 mn 7.875% notes due April 4, 2018 with a loss given default (LGD) assessment of LGD4/50%. The outlook on all ratings remains negative, according to the announcement of the Rating Agency.

The rating operation was prompted by DTEK's inability to make the USD 29.5 mn scheduled interest payment on its USD 750 mn notes and the USD 8.3 mn on its USD 160 mn notes (unrated) within the 30-days grace period following their due date on April 4th 2016 and March 28th 2016, respectively, as stipulated in the notes' terms, Moody’s stresses, considering the event to be a default. Meanwhile, on April 26, 2016 DTEK secured note holders’ agreement to a standstill until October 28, 2016, supposing a waiver on events of defaults.  The affirmation of DTEK's CFR and DTEK Finance Plc's senior unsecured debt rating acknowledges that DTEK entered into a standstill agreement with the note holders. This agreement, together with another negotiated arrangement with its creditor-banks (expected by end of May 2016, according to Moody’s) should allow DTEK to continue operations and provide the company with the timeframe to negotiate a long-term debt restructuring with its creditors, Moody’s estimates.

The negative rating outlook reflects the missed interest and principal payments on DTEK's debt facilities, and the risk that economic losses to note holders will be significantly higher than would be normally expected from a corporate bond in case of default, the Rating Agency maintains. Moody's rating currently assumes that economic losses to note holders would be in a range of around 35% to 65%. As of April 1, 2016, DTEK's missed interest and principal payments to the banks totaled around USD 720 mn, according to the company.

Moody's views DTEK's liquidity position as stressed and likely to remain so over the next 12 months given its limited cash generation capacity and currency mismatch between debt and revenues.

Our view: the rating news should have a NEUTRAL impact on the company, considering that the underlying factors of the assessment were already factored in market prices by the time the agreement with note holders was announced. Overall, we see the chances of the company to reach a comprehensive debt restructuring agreement with its note holders and creditors to be high, considering that a failure to come to a mutually suitable solution would result in great damages for the company and the debt holders altogether under the current market conditions. Currently DTEK’s 2018 Eurobonds are traded below all major peers, and far below the sovereign benchmark, in the range of 40 cents on the Dollar.

 

Disclaimer

Although the information in this report has been obtained from sources which Empire State Capital Partners believes to be reliable and was collected in good faith, we do not represent or warrant its accuracy, except with respect to information concerning Empire State Capital Partners, its subsidiaries and affiliates, either expressly or implied, and such information may be incomplete or condensed. Nor has the information and/or data been independently verified, and so is provided without further caveat regarding its reliability, suitability for commerce or specific purpose. 

This report does not constitute a prospectus and is not intended to provide the sole basis for an evaluation of the securities discussed herein. All estimates and opinions included in this report constitute our judgment as of the date of the report and may be subject to change without notice. Empire State Capital Partners or its affiliates may, from time to time, have a position or make a market in the securities mentioned in this report, or in derivative instruments based thereon, may solicit, perform or have performed investment banking, or other services (including acting as advisor, manager) for any company referred to in this report and may, to the extent permitted by law, have used the information herein contained, or the research or analysis upon which it is based, before its publication. Empire State Capital Partners will not be responsible for the consequences of reliance upon any opinion or statement contained herein or for any omission. This report is confidential and is being submitted to select recipients only. It may not be reproduced (in whole or in part) without the prior written permission of Empire State Capital Partners.

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Ukraine Markets Daily

Market news

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Market comment

The UX index remained unchanged on Friday as well as the PFTS index due to holidays. The WIG-Ukraine index increased by 0.6%. On the interbank exchange market, the UAH/USD remained unchanged too at UAH 26.10 (mid price), according to Thomson Reuters. The official exchange rate reported by the NBU was UAH 26.35.

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