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Ukraine Markets Daily (April 10, 2017)

Market news

  • Consumer prices increased by 1.8% m/m in March
  • Moody’s upgrades Ferrexpo ratings to Caa2
  • Moody’s downgrades Privatbank’s Long-Term Foreign Currency Senior Unsecured Debt to C

Market comment

The UX index decreased by 0.3% on Friday while the PFTS index remained unchanged. The WIG-Ukraine index was down by 0.8%. On the interbank exchange market, the USD/UAH was down by 0.3% to UAH 26.94 (mid price), according to Thomson Reuters. The official exchange rate reported by the NBU was UAH 27.10

 

Consumer prices increased by 1.8% m/m in March

Consumer prices increased by 1.8% m/m (15.1% y/y) in March, 2017, accelerating from 1.0% m/m (14.2% y/y) in February, according to the State Statistics Service of Ukraine. The prices of food and beverages increased by 1.1% m/m (7.2% y/y), slowing from a growth of 1.5% m/m (5.2% y/y) in February. The inflation momentum in utilities accelerated to 5% m/m (49.5% y/y), from 0.2% m/m (46.5% y/y), driven by a price increase of 28.1% y/y (63.7% y/y) in electricity. The price expansion in durable goods slowed to 0.1% m/m (2.8% y/y) from 0.2% m/m (3.5% y/y), while the price increase in transport goods and services decelerated to 0.7% m/m (16.8% y/y). Core inflation accelerated to 1.7% m/m (6.3% y/y) from 1.9% y/y (6.6% y/y) in March, according to the data release.

Our view:

A scheduled increase in electricity prices under the government policy of adjusting energy prices to market level above all drove the strong consumer price momentum in March, together with an upward adjustment in the cost of residential maintenances (4.4% m/m). In the meantime, the general price level is still high due to the impact of increasing production cost. Nevertheless, despite the administrative price intervention, a slowing price development is observed through the consumer market, therefore expecting a further price deceleration through the year.

 

Moody’s upgrades Ferrexpo ratings to Caa2

On April 7, 2017, Moody's Investors Service, ("Moody's") upgraded Ferrexpo Plc (Ferrexpo)'s Corporate Family Rating (CFR) to Caa2 from Caa3, the company’s probability of default rating (PDR) to Caa2-PD from Caa3-PD and the rating on the senior unsecured notes issued by Ferrexpo Finance plc to Caa2 from Caa3, according to the statement of the rating agency. The upgrade of the rating to Caa2 reflects Ferrexpo's improved liquidity profile, expressed by a cash balance of USD 145 mn at the end of 2016 and expectations of strong cash flow generation in 2017-2018, including an estimated free cash flow (FCF) of around USD 250 mn in 2017 and USD 70-100 mn in 2018, Moody’s maintains. At the same time, the rating reflects the company’s improved business configuration enabled by the migration towards the higher premium 65% Fe pellets segment. Moody’s notes that the rating is restrained by Ukraine’s country ceiling of Caa2, together with the company’s exposure to the country’s domestic uncertainties. Despite the high country risk, however, the rating agency expects that Ferrexpo will be able to sustain an adequate operating and financial performance, as well as adequate liquidity. Moody’s expect Ferrexpo to maintain an EBIT margin above 20% and an adjusted debt/EBITDA below 2.0x in 2017-2018, therefore upholding a strong financial profile. Moody’s estimates the Capex need of Ferrexpo to amount to USD 60-70 mn in 2017-2018, while at the same time allowing dividend payments of about USD 40 mn in 2017-2018. Ferrexpo will be able to meet the payments on the USD 202 mn debt due in 2017 using its cash flow generation and available cash balance, and leaving some room to handle the USD 328 mn debt maturing in 2018, according to Moody’s view. In the meantime, the rating agency notes a risk stemming from a potential weakening of iron ore prices in the coming quarters, from the large production concentration in Ukraine, and high customer concentration (three main customers account for c. 40% of the group’s revenue in 2016).

Our view:

The rating upgrade reflects Ferrexpo’s strong performance from 2016, and the demonstrated improvement in its financial position after the less successful development of 2015. In the meantime, we see the company’s operations to be vulnerable to the recent negative development in the Ukrainian economic, political and security environment. Additionally, the company is exposed to fluctuations on the global commodity market, ensuing among others from increased geopolitical risks. Overall, however, we see the company to benefit from further improvement in Ukraine’s country rating in 2017, not least thanks to advances in reforms.

 

Moody’s downgrades Privatbank’s Long-Term Foreign Currency Senior Unsecured Debt to C

On April 7, 2017, Moody's Investors Service downgraded the long-term foreign-currency senior unsecured debt rating of Privatbank to C from Ca . The bank's baseline credit assessment ("BCA"), adjusted BCA, long and short-term local and foreign currency deposit ratings, and its long and short-term Counterparty Risk Assessments were unaffected by the rating action. The rating downgrade primarily reflects Moody's expectation that the holders of Privatbank’s Eurobonds will incur significant losses, following the bail-in of the notes and their conversion into the bank’s equity as part of the bank’s nationalization and recapitalization process. The C senior unsecured debt rating does not carry outlooks, therefore Moody's will then withdraw the C foreign currency senior unsecured debt rating of Privatbank, the report reads. Moody's did not rate the bank's subordinated obligations.

Our view:

The news is NEGATIVE, reflecting the occurrence of material losses to investors, following the non-payment of the coupon on the bank’s Eurobonds in February 2017, after the bail-in of the notes in December of 2016. We note that the bank, the government and the note holders seem to have made no advances towards some form of concession to the investors after the nationalization of the bank. Meanwhile, the Privatbank still failed to devise any sustainable recovery strategy, therefore still complying with our worst-case post-nationalization scenario.