Ukraine Markets Daily (January 14, 2015)

Market news

  • Ukraine’s parliament passed two laws on reforming the judiciary system in first reading 
  • US could provide USD 2 bn in credit loan guarantees to Ukraine contingent on reforms progress
  • The Ukrainian parliament decreases quorum for shareholders’ meeting to 50% plus one share

Market comment

The UX Index was up by 1.2% in UAH terms on Tuesday, and up by 1.5% in the US dollar terms, while the PFTS index was up by 1.9% in UAH terms. Only four out of ten companies in the UX index were up in the UAH terms with the largest increase in prices observed for Ukrnafta (16.2%), Azovsteel (2.6%) and Motor Sich (1.5%).

 

On the interbank exchange market, the USD/UAH spot rate was down by 0.3% with the closing price of 16.25 (mid price) on Tuesday, according to Minfin.com.ua, while the average exchange rate reported by the NBU was 15.77.

Ukraine 5-year CDS were up by 3.4% on Tuesday.

 

Ukraine’s parliament passed two laws on reforming the judiciary system in first reading

Yesterday the Ukrainian parliament adopted two bills on the judicial reform in first reading (#1497 and #1656). The first bill, submitted by Ukraine’s President Petro Poroshenko, introduces the Higher Qualification Commission of Judges, which will assess the professional level of the judges. According to the results of the certification the judges will be assigned to the appropriate qualification class. In addition, the bill expands the list of grounds for bringing disciplinary proceedings against judges. The law also obliges courts to publish any kind of rulings to the Unified Register of Judicial Decisions.

The second bill proposes to merge the courts of civil and economic jurisdiction, namely reorganize local economic court in the district courts for civil and criminal cases. In addition, the Supreme Economic Court is proposed to be merged with the Supreme Court to review civil and criminal cases, with a significant strengthening of the Supreme Court’s authority. The second bill also increases disciplinary responsibility of judges. The authors of the bill are the deputy chairman of the parliament Oksana Syroid and MPs Elena Sotnik and Andriy Zhurzhiy ("Samopomich" political party), Leonid Yemets ("Narodniy Front") and Ivan Krul’ko ("Batkivshina").

Our view:

The news is POSITIVE for the Ukrainian economy. The long-awaited reform of the judicial system starts with these two new bills, and we expect intense public discussion which should result in a combination of the proposed bills that will incorporate suggestions and propositions of the business and society. Moreover, with the planned reattestation of the judges and increased responsibility for misconduct, the overall efficiency of the system should increase.

 

US could provide USD 2 bn in credit loan guarantees to Ukraine contingent on reforms progress

According to the statement of the US Treasury Department, the US intends to provide a USD 1 bn loan guarantee to the Ukrainian government in 1H2015, provided Ukraine remains on-track with the reform program it has agreed with the IMF.  Furthermore, if Ukraine continues making concrete progress on its reform agenda, the U.S. Administration will be willing to provide an additional USD 1 bn loan guarantee in late 2015.  As was stated in the press-release, the proceeds of these loan guarantees will help enable the Ukrainian government to protect the most vulnerable Ukrainian households from the impact of needed economic adjustment. 

In 2014, the US provided a USD 340 mn assistance package to Ukraine, in addition to the USD 1 bn sovereign loan guarantee provided in May 2014.

Our view:

The news is POSITIVE for the Ukrainian economy. An additional support from the US will help increase the country’s international reserves and ease off some pressure on the local currency, ultimately decreasing the chances of Ukraine defaulting on its obligations this year.

 

The Ukrainian parliament decreases quorum for shareholders’ meeting to 50% plus one share

Yesterday the Ukrainian parliament adopted the bill #1310 on changes to the Law on Joint-Stock Companies. The bill changes the existing quorum requirements for companies with 50% of state-owned capital to 50% plus one share from 60%. As was stated in the explanatory note, the law will solve the problem of protection of interests and corporate rights of the State, and will take the first step in the unification of Ukraine’s legislative base with the international standards on quorum requirements for general meetings of public companies.

Our view:

The news is POSITIVE for Ukrnafta [UNAF UK], the largest Ukrainian oil producing company, as previously a lot of attempts of the Ukrainian government to assign new management and approve dividends payment were blocked by shareholders affiliated with Privatbank group, which hold 42% of the company’s shares. Thus, with the new law coming into force, the State can convene an extraordinary shareholders’ meeting and change the management of the company, thus eliminating some of the transfer pricing risks that were present before (Privatbank group’s key beneficiary Igor Kolomoisky also owns a network of gas stations and an oil refining plant). 

However, it was speculated that there is a loophole in the current law, as the State does not directly own Ukrnafta (50%+1 shares of the company belong to the state-owned “Naftogaz Ukraine”), which could provide legal grounds for Privatbank group to block the Ukrainian government’s attempts to convene a shareholders’ meeting and remain in control of Ukrnafta until 2016. Despite this factor, the company’s shares have already gone up by 16% in the UAH terms on the news.

 

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.