Ukrainian Eurobonds - Kicking the Can (January 28, 2015)

Considering the deteriorating political and economic environment in Ukraine coupled with the rapid UAH devaluation, we expect the government to restructure sovereign and quasi-sovereign Eurobonds due in 2015 (and possibly 2016). The private sector has already felt the trend with Metinvest and Ferrexpo being the first to offer restructuring terms. We consider most of other 2015-2016 corporates to follow and have run several restructuring scenarios which indicate most these corporates being overpriced in our view. 

 The Ukrainian government may ask holders of sovereign Eurobonds due in 23.09.2015 and 13.10.2015 to extend maturities. An early sign for investors was the statement of the Minister of Finance Natalie Jaresko, in which she promised to start negotiations with the holders of sovereign Eurobonds after completion of the IMF negotiations on the extended arrangement. Meanwhile, we expect the government to continue making payments due to the IMF and Eurobond coupon payments in 1H2015, as the repayment burden is comparatively light in 1H2015 (USD 2.0 bn) but will increase in 2H2015 (USD 6.0 bn). The peak of debt redemptions will come in December, when Ukraine should repay USD 3 bn to Russia. There is no chance that Russia will consent to restructure this issue, in our view. If Russia demands an early repayment of USD 3 bn Eurobonds due in December 2015 (referring to the breach of the covenant that does not allow the public debt of Ukraine to reach 60% of GDP), we believe that Ukraine will have no choice but to repay it from international reserves.

We expect that the IMF will agree to extend its program, possibly with an increased size (conditional on the new plan of reforms, of course), which will help replenish the depleted foreign reserves of Ukraine and restore the government’s ability to repay its debts. However, negotiations with the IMF are likely to be extremely tough given the slow pace of reforms and controversial State Budget established by the parliament on New Year’s Eve. 

We expect restructuring of quasi-sovereign Eurobonds of state-owned Oschadbank (with maturity in 2016) and Ukreximbank (2015) which will follow the sovereign issues and prolong maturities. We think this expectation hasn’t been fully priced-in for UKREXIM-15 and the bond deserves a 18-19 points lower price in our view. Moreover, we estimate that the price for CITKIE-15 Eurobonds should be lower by some 5 points if the municipal authorities decide to prolong the maturity of bonds by 5 years without offering an increased coupon or an amortization scheme. 

Metinvest was the first among the corporate issuers to start restructuring in 4Q2014 setting the framework for the followers: 25% cash consideration, swap into 3-year new issue with amortization schedule of 4 payments. On January 19th, 2015 Ferrexpo proposed the terms of restructuring of its 2015 Eurobonds: 20% cash consideration, swap into 4-year issue with amortization schedule of 2 payments. 

We expect restructuring of corporate issues of PRBANK-15, DTEK-15, and AVINPU-15 to be announced shortly by the issuers. While Privat and DTEK issues seem to fully price-in the restructuring risk, we see that Avangard’s Eurobonds are underpriced by 6 points. MHP-15 seems to be an exception to the restructuring trend as in June 2014 the company signed an agreement with the IFC to receive USD 250 mn towards its Eurobonds’ refinancing.

 

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