Ukraine Markets Daily (June 4, 2015)

Market news

  • Pro-Russian militants probe the Ukrainian defense line near Donetsk
  • Moody's assigns Counterparty Risk Assessments to Ukrainian banks
  • Serinus receives a 3-year extension for its Romanian Satu Mare field; increases effective interest to 100%

Market comment

The UX Index was down by 0.2% in UAH on Wednesday, and up by 0.4% in the US dollar. The PFTS index increased by 0.9% in UAH terms. Five out of ten companies in the UX index were up in UAH terms, with the largest increase in prices observed for Kryukiv carriage (5.7%) and Azovstal (1.4%), while the deepest decline was recorded for Ukrnafta (-7.8%)

On the interbank exchange market, the USD/UAH fell by 0.6% and stood at 20.95 (mid price) on Wednesday according to Bloomberg. The official exchange rate reported by the NBU was UAH 21.07.

Ukraine 5-year CDS fell by 2.4% on Tuesday.


Pro-Russian militants probe the Ukrainian defense line near Donetsk

According to the statement of the Press Service of the General Staff of the Ukrainian Armed Forces, around 4 am on Wednesday (June 3, 2015) the pro-Russian militants began a major offensive in the area of Maryinka (west from Donetsk) with tanks and self-propelled artillery cannons, which forced the Ukrainian army to bring back artillery from the positions outlined by the Minsk Agreement artillery and repel the aggression. As was stated in the report, the militants used 10 tanks and around 1,000 men in the offensive, supported by artillery cannons. Active clashes ended by Wednesday’s evening, with no further activity from the pro-Russian militants. As of June 4, 2015, four casualties from the Ukrainian side have been reported, with another 30 injured. 

The attack was immediately criticized by the representatives of the US and the EU. The US State Department spokesman Marie Harf commented that such attacks were unacceptable and could lead to additional costs for Russia, as it bears a direct responsibility for preventing these attacks and implementing a cease-fire.

Our view:

The renewal of active clashes in Eastern Ukraine is definitely a worrying sign. However, we note that the attack was stopped immediately after the Ukrainian army decided to use heavy artillery (without actually having to use it much, according to some reports), while the reaction of the international community was swift and conveyed a clear message of further sanctions against Russia unless the aggression is stopped.

Moody's assigns Counterparty Risk Assessments to Ukrainian banks

On June 3, 2015, Moody's Investors Service has assigned Counterparty Risk Assessments (CR Assessments) to Ukrainian banks. The Agency assigned CR Assessments of Caa3(cr) to Ukreximbank, First Ukrainian International Bank, PJSC and Bank Finance and Credit JSC. Concurrently, Not-Prime (cr) short-term CR Assessments have been assigned to all the banks. The CR Assessment of Caa3(cr) for Ukreximbank, First Ukrainian International Bank and Bank Finance and Credit JSC are one notch higher than their deposit ratings. 

CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and are distinct from debt and deposit ratings in that they consider only the risk of default rather than expected loss and apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. The CR Assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities. In most cases, the starting point for the CR Assessment is one notch above the bank's adjusted baseline credit assessment (BCA), which represents the rating agency's view of the probability of a bank failing on its obligations without considering government support. Moody's then adds the same likelihood of support uplift as applied to deposit ratings. However, none of the Ukrainian banks covered in the announcement benefits from government support as the government's capacity to support the banks in case of need is very limited, according the Agency’s assessment.

Our view: 

The news is negative for the banks, as showing the banks to be at near-default position. However, we estimate that the risks, generated by the current operating environment of banks, have been already factored in the market valuation of these banks. Moreover, the signs of gradual phasing of the economic crisis away and partial resumption of deposit inflow into the banking system, together with commitments of the National Bank to support the banking system with liquidity, allows considering a gradual strengthening of the financial position of the banks forward.

Serinus receives a 3-year extension for its Romanian Satu Mare field; increases effective interest to 100%

Yesterday Serinus [SEN PW], an international oil&gas exploration and production company with assets in Ukraine, Tunisia and Romania, announced that it has signed the Addendum for the 3 years extension approval to the exploration period for its Satu Mare Concession in northwest Romania from the National Agency for Mineral Resources. 

Additionally, while Serinus currently holds a 60% interest in the concession agreement, the company reported that other interest holder has given notice that it intends to withdraw from the operating agreement and assign its 40% interest in the Satu Mare concession to Serinus. However, due to certain legal requirements pertaining to this interest holder, it will hold its 40% interest in trust for the benefit of Winstar (Serinus’ subsidiary in Romania) until it is able to withdraw from the joint venture and formally assign that interest to the company.  This gives Serinus an effective 100% working interest in Satu Mare.

As was stated in the press-release of Serinus, with the granting of the extension now complete, the company will pursue getting its recent natural gas discovery at Moftinu on stream as soon as possible.  The Moftinu-1001 well tested 7.4 MMcf/d and 19 bbl/d of liquids, and Serinus estimates that the P50 recoverable resources associated with this accumulation are between 17 – 30 Bcf.  The Moftinu 1002bis well encountered gas in lower zones, and Serinus’ management estimates that there is 27 Bcf of original gas in place.

Our view:

The news is POSITIVE for the company. Obtaining an extension for the Satu Mare field gives Serinus the possibility to proceed further with exploration of the field and establishing a production concession. The company indicated that it could receive netbacks in the range of USD 2.7-4.4 per Mcf, depending on the actual gas price in Romania.



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