Ukraine Markets Daily (November 23, 2016)

Market news

  • Industrial output grew by 0.8% y/y in October
  • Fitch Upgrades Ukreximbank and Oschadbank Long-Term Foreign Currency IDR to B- from CCC
  • Ukrainian Railway solicits waiver on events of default on local debts up to end of 2017

Market comment

The UX index and the PFTS (in UAH terms) indexes remained unchanged Yesterday. The WIG-Ukraine index was up by 0.3%. On the interbank exchange market, the USD/UAH was down by 0.4% to UAH 25.63 (mid price), according to Bloomberg. The official exchange rate reported by the NBU was UAH 25.66.


Industrial output grew by 0.8% y/y in October

Industrial production grew by 0.8% y/y in October, expanding however by 1.6% y/y if taking account of the seasonal factor and the difference in calendar days, according to the State Statistics Service. Mining output contracted by 1.9% y/y during the month redressing from a 5.4% y/y downswing in September. Manufacturing production increased by 1.3% y/y, slowing from 4.6% y/y growth in the previous month. Energy generation and distribution grew by 3.7% y/y, decelerating from 5% y/y increase in September. In ten months of the current year, industrial growth amounted to 1.9% y/y, increasing by 3.2% in manufacturing, by 1.6% y/y in the energy sector, while declining by 0.7% y/y in mining.

Our view:

Besides the seasonal factors, the slowing pattern of industrial growth was conditioned by the consolidating comparative base for the corresponding period of the previous year. We think that, industrial growth has been also affected by the latest swing on foreign currency markets, complicating supplies to such industrial sectors as chemical and petroleum production, textile, as well as manufacturing of computer, electronic and optical products.


Fitch Upgrades Ukreximbank and Oschadbank Long-Term Foreign Currency IDR to B- from CCC

On November 21, 2016, Fitch Ratings upgraded the Long-Term Foreign Currency Issuer Default Ratings (IDRs) of seven Ukrainian banks, including The JSC State Export-Import Bank of Ukraine (Ukreximbank) and JSC State Savings Bank of Ukraine (Oschadbank), to 'B-' from 'CCC'. The Outlooks on the banks' Long-Term IDRs are Stable. The Long-Term Foreign Currency and Local Currency IDRs of the two state banks are upgraded to 'B-' from 'CCC', Outlook Stable. Their Senior unsecured debt are upgraded to 'B-' from 'CCC', and the Recovery Ratings affirmed at 'RR4'. The Short-Term Foreign Currency IDR of the banks is upgraded to 'B' from 'C'. In the meantime, the Support Rating of the banks is affirmed at '5', whereas the Support Rating Floor is revised to 'B-' from 'No Floor'. The National Long-Term rating is upgraded to 'AA(ukr)' from 'AA-(ukr)', Outlook Stable. The banks' Viability Ratings, as well as Ukreximbank's subordinated debt rating are not affected. The rating actions follow the upgrade of Ukraine's Long-Term Foreign and Local Currency IDRs to 'B-' from 'CCC' with Stable Outlooks and the revision of Ukraine's Country Ceiling to 'B-' from 'CCC', undertaken by Fitch Rating on November 11 of the current year. Meanwhile, the revision of the Support Rating Floors (SRFs) to 'B-' from 'No Floor' and upgrades of state-owned Ukreximbank and Oschadbank reflect Fitch's view that the Ukrainian authorities' ability to provide support to the banks, in case of need, has somewhat improved. Nevertheless, it remains limited, in particular in foreign currency, the rating agency maintains.

Our view:

The rating upgrade is POSITIVE, supporting the consistent improvement in the investment attractiveness of the two banks after the restructuring of their Eurobond Issues in 2015. However, the rating development shows the banks to be highly dependent upon government support, therefore widely exposed to the sovereign risks. Consequently, further changes in the banks’ ratings still depend upon the creditworthiness of the Government itself in the medium term. On the longer-term, however, a progress in the restructuring of the banks and in implementing the recently adopted strategies of the state banks would allow reducing their dependence and exposure to the state.


Ukrainian Railway solicits waiver on events of default on local debts up to end of 2017

On November 22, 2016, the state-owned PJSC Ukrainian Railway has published a consent solicitation memorandum with regards to its USD 500 mn Eurobonds due in 2021. The company is seeking three amendments to the existing Loan Agreement on the Eurobonds, offering an extension of the Debt Restructuring Period stipulated by the Agreement until December 31, 2017, allowing an additional carve-out from the cross-default provision to take special account of the indebtedness associated with the Donetsk Railway, and a waiver on default ensuing from failure to complete the restructuring of the local debt before the expiration of the Debt Restructuring Period on September 14, 2016 due to issues of government approval procedures. Therefore the amendment should allow the company to handle the debt of the Donetsk railway apart from the other local indebtedness due in 2017. The issuer asks to amend the Loan Agreement through separation of the Donetsk Local Indebtedness from the overall body of the Designated Local Indebtedness, and introduce a waiver on default on the indebtedness inherited from the Donetsk Railway for an indefinite period, considering the lack of clarity as to the assets of the company located in the eastern Ukrainian conflict zone, outside control of the Central Government. The Borrower considers the resolution of issues relating to payment or restructuring of the Donetsk Designated Local Indebtedness and the Additional Donetsk Local Indebtedness to be dependent on restoration of the Borrower’s physical control over operating assets of the Donetsk Railway located in the zone of anti-terrorist operations in the Donetsk and Lugansk regions. Until such time, the Borrower expects to be or remain in default on payments under the Donetsk Designated Local Indebtedness and the Additional Donetsk Local Indebtedness. The Borrower notified the Trustee of the occurrence of an Event of Default on September 15, 2016. Ukrainian Railway offers a consent fee of USD 5 per each USD 1000 principal amount of the Notes. The Note Holders’ meeting is scheduled on December 7, 2016, and an adjourned meeting on December 21, 2016 in case of failure to reach an agreement at the first meeting. The occurrence of the effective date of the new agreement depends upon registration of the amendments to the Loan Agreement by NBU. As of November 1, 2016, the outstanding indebtedness of the company amounts to the equivalent of USD 918 mn, according to the Company’s presentation. The company has managed to restructure up to 43% of the stock of its local debt. Approximately USD 237.5 m in aggregate principal amount of the Designated Local Indebtedness has not been restructured, consisting of USD 64.4 mn of the Designated Local Indebtedness that was originally incurred by the Donetsk Railway, and approximately USD 173.1 mn in principal amount of the Designated Local Indebtedness that was originally incurred by entities that were part of the Original Group (other than Donetsk Railway).

Our view:

The news is POSITIVE at last shedding light upon the debt position of the Company. We think the special consideration to the issue of the company’s operations in the conflict-ridden Donetsk region to be reasonable. The passing of the Memorandum should finally help moving the debt restructuring negotiations of the company to some end result. The passing of the Memorandum should allow more confidently proceeding with the implementation of the company’s restructuring, investment, and development program.