Ukraine Markets Daily (April 24, 2015)

Market news

  • Losses of operating banks in Ukraine reached UAH 16 bn in 1Q2015
  • DTEK announced the results of its Exchange Offer

Market comment

The UX Index was up by 1.6% in UAH terms on Thursday, and up by 2.0% in the US dollar terms, while the PFTS index was up by 1.7% in UAH terms. Nine out of ten companies in the UX index were up in the UAH terms, with the largest increase in prices observed for Ukrnafta (7.7%), Kryukiv carriage (4.7%) and Motor Sich (1.1%).

On the interbank exchange market, the USD/UAH spot rate was down by 0.4% with the closing price of 22.50 (mid price) on Thursday according to Bloomberg. The official exchange rate reported by the NBU was 22.53.

Ukraine 5-year CDS were down by 0.2% on Thursday.

 

Losses of operating banks in Ukraine reached UAH 16 bn in 1Q2015

According to the press-release of the National Bank of Ukraine (NBU), the losses of banks operating in 1Q2015 totaled UAH 16.2 bn, while overall losses of all banks (including insolvent banks) amounted to UAH 80.2 bn. 

As was stated by the NBU, the negative financial result of banks was primarily caused by significant amounts of allocations to provisions for losses on active operations, including for loans to borrowers whose solvency has deteriorated. According to the NBU, the bulk of reserves was formed in February 2015, while in March the increase of allocations to reserves slowed down significantly on the back of the stabilization of UAH.

In order to create the necessary conditions for the stabilization of the banking sector, the NBU adopted a number of decisions: the regulator developed a unified set of rules for the internal control system aimed at improving the quality of risk management, and recommended banks to make a proper assessment of the risk of counterparty default and create full reserves for possible losses. Banks that violate the requirements of the regulator should develop and submit a detailed plan to address those issues to the NBU, as well as explore the possible ways of increasing the capitalization of a bank and improve the quality of their assets.

According to the Deputy Head of the NBU Oleksandr Pysaruk, the regulator started the diagnostic examination of 20 largest Ukrainian banks, which should result in recommendations regarding the required capitalization and risk reduction of transactions with related parties. As was stated by Pysaruk, this would balance the work of banks and help restore their profitability.

Our view:

The increase in the reserves of the Ukrainian banks in 1Q2015 most likely follows the sharp devaluation of UAH to 30-35 in February 2015, which caused the banks to adjust their allocations. However, since then the FX market has stabilized at the exchange rate of 23-25 per USD thanks to strict administrative measures introduced by the NBU.  Nevertheless, we expect more banks to be declared insolvent in 2Q2015 as part of the NBU’s ongoing efforts to clean the banking system of Ukraine. We envision a slow recovery of the banking sector after the largest banks are sufficiently recapitalized by their shareholders, possibly in mid-2016.

 

DTEK announced the results of its Exchange Offer

Yesterday DTEK, the largest energy producing company in Ukraine, announced the results of the Exchange Offer for its Eurobonds due in 2015. According to the company’s statement, 91% of holders have agreed to the terms of the Exchange Offer before the specified deadline (April 22, 2015), whereas DTEK had set up a minimum acceptance condition of 98%. Accordingly, DTEK noted that the Exchange Offer has expired and will not be consummated; however the company will proceed with the issue of the new notes due in March 2018 bearing the interest rate of 10.375% to replace the old issue (“the Scheme”). Additionally, a cash consideration of 20% of the old notes will be paid to all bondholders, and the Early Exchange Fee of USD 30 per each USD 1,000 of the nominal value will be paid to holders who submitted their irrevocable instructions in relation to the Scheme prior to the Early Exchange Deadline (April 13, 2015). 

The High Court of Justice of England and Wales is expected to convene on April 27, 2015 to sanction the Scheme. The Scheme would then become effective and binding upon all Holders once the Scheme Sanction Order is filed with the Registrar of Companies.  The existing notes would then be acquired by the issuer in accordance with the terms and conditions of the Scheme. The issuer would then cancel all outstanding existing notes and the holders would receive the Exchange Offer Consideration.

Our view:

The failure to meet the minimum acceptance condition of 98% effectively means that DTEK will now move to the scheme, under which the same terms are applied as in the Exchange Offer, with the difference that all bondholders, whether or not they participated in the Exchange Offer and Consent Solicitation, will receive the new notes and the cash consideration. This is certainly beneficial for DTEK, as the company will not have to redeem the remainder of the existing notes at the initial maturity date (April 28, 2015).

 

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.

Any recommendations, opinions, forecasts, estimates or views herein constitute a judgment as at the date of this report. This document has been produced independently of Empire State Capital Partners and the recommendations, forecasts, opinions, estimates, expectations, and views contained herein are entirely those of the research analyst(s). While all reasonable care has been taken to ensure that the facts presented herein are accurate and that the respective recommendations, forecasts, opinions, estimates, expectations, and views are fair and well considered, none of the research analyst(s), Empire State Capital Partners or any of its directors, managers or employees has verified the contents of this document and, accordingly, no research analyst, Empire State Capital Partners or any of its respective directors, managers or employees shall be in any way responsible for its contents.