The Government of Ukraine will likely price its 10-to-15-year US dollar bond in the lower-7% area and the deal should be comfortably oversubscribed, said four portfolio managers, one trader and an economist.
They said the sovereign is right to take advantage of strong EM momentum which has seen post-restructuring peers such as Argentina, Iraq and Ivory Coast come to market in recent months. This outweighs any concerns over the Russia bond, and IMF disbursement delays.
The deal is Ukraine’s first standalone sovereign bond since Russia’s annexation of Crimea in 2014. The country has experienced a marked revival in its credit fortunes since, with its GDP-linked warrants almost doubling in price from 30 since March.
Ukraine's momentum gathered with the country's macroeconomic turnaround and steady support from institutional investors is likely to overshadow a turbulent economic history, according to the market participants polled by Debtwire.
“The talk is that they plan to issue up to USD 1bn of new money, plus the additional cover for buyback,” said the first PM.
Existing 10-year paper is trading at 104, at the time of writing, with a yield of 7.15%. “If they issue USD 1bn, with a 10-15 year tenor, we would be looking into pricing around 7.25%,” the PM continued.
“At this rate, the USD 15-year will come at 7.25%,” agreed the first trader.
Before the roadshow, the government, which in November 2015 restructured USD 15bn of its external debt and extended its debt maturities, announced a tender offer to buy back its outstanding 2019s and 2020s notes for 106 and 106.75, respectively.
During the London meetings, some investors questioned the prices offered on the buy-back in times of tight emerging markets spreads. “Investors feel they can get more in the market,” said the first PM. “That is not a very attractive offer.”
But others were more confident that this was a right move from Ukraine. “After the tender was set, it is guiding the market and bonds will not rally over 106 and 106.75,” said the second PM, adding that “Ukraine is definitely in good shape and is taking advantage of the [favourable] market conditions.”
The right peer and metrics
All the sources agreed that Ukraine’s issuance will attract widespread attention in the manner of credits such as Argentina, Iraq and Ivory Coast, which issued heavily oversubscribed bonds earlier this year after lengthy absences and emerging from debt defaults.
“They got the message from markets that the window is open and they should take part in the momentum,” said the first PM.
Iraq’s 5.5-year paper, for example, was 6x oversubscribed at 6.75%, whereas Ivory Coast’s books topped USD 4.8bn for its USD 1.25bn 6.250% note and EUR 4.4bn for the EUR 626m 5.125% note, as reported.
“When looking into those issuances and how well received they were, Ukraine probably thought ‘Oh, we have better fiscal metrics than all of them, so why not take advantage of this momentum?", said the third PM.
International Monetary Fund data forecasts Ukraine’s budget deficit in 2017 to be below 3% of GDP, from below 10% of GDP in 2014.
“Ivory Coast’s budget deficit is slightly lower, at 2.2% of GDP, but Argentina is at 7.3%,” said the third PM. “Ukraine fits well in this picture.”
He added that Ukraine’s real GDP growth is also positive and expected to be 1.8% at the time of its return to capital markets. This compares to 1.8% for Argentina and 7.9% for Ivory Coast.
Intervention made fractious
All the sources expected the IMF to disburse around USD 1.9bn to Ukraine by October, as part of the fifth tranche of a USD 17.5bn Extended Fund Facility (EFF).
“Having the Fund on board shows commitment from the sovereign towards the reforms and boost their engagement with capital markets,” said the third PM.
The tranche has been delayed for several months, as reported. But the Ukrainian government is bracing itself for a possible mission from the Fund starting next week, on 19 September. Whether that mission will go forward depends on the outcome of the IMF’s First Deputy Managing Director David Lipton’s visit to Kiev this week.
According to a sovereign lawyer looking at Ukraine’s issuance plans, the country has always had a complex relationship with the IMF regarding the EFF. There has been a constant back-and-forth as the Fund has inserted new demands and conditions.
“So far, the country was able to keep the IMF on board, but it's never been a super smooth linear process,” he said. “The disbursements from the IMF have long been slower than anticipated under the framework envisaged at the start of their involvement.”
Ukraine has said that it is working towards passing pension and land reform bills, despite delays, noted the first and second PM. These are next among the conditions attached to the IMF’s programme.
“Since the crisis, Ukraine has committed to trade, opening to international capital markets, IMF reforms attached to conditionality and has aligned itself with Europe - which is very valuable to investors,” said the first PM.
Forging ahead, and falling behind
Ukraine’s recent macroeconomic achievements are largely attributable to foreign money coming into the country. Alongside the USD 17.5bn IMF programme, the country obtained a USD 4.6bn commitment from the World Bank for 2014-16, plus an additional USD 655m for 2017. It has also received a EUR 11bn package from the European Union, the European Investment Bank and the European Bank for Reconstruction and Development; and USD 3bn of loan guarantees from the United States Treasury, according to Ukraine’s Ministry of Finance.
Ukraine’s challenge, according to the economist, as well as the first and the fourth PM, will come in 2019, when most of the programmes and budget support that spurred its economic growth will end.
“In the long run, once they need to stand on their own feet, this might not be sustainable,” said the first PM. “It can look positive as long as they are committed to the reforms and keep on being integrated to international capital markets, but no one knows what the macro environment will look like in 2019.”
According to the economist, Ukraine needs to secure the bond buy-back but cannot exceed the amount substantially or the increased debt issuance could prove counterproductive in the long run.
“They need to consider a big chunk of maturities due in 2019-2020, where they have to repay principal amounts on most of their restructured bonds and also consider that the IMF programme will end around then,” he said.
In the meantime, the Ukrainian capital remains busy as the cabinet will seek to submit on Friday the final draft of the government’s 2018 budget to Parliament, as reported.
See you in court, Russia!
During the meetings, buysiders questioned Ukraine’s ability to issue fresh paper while being in default on USD 3bn of Eurobonds held by Russia. The case went to the UK courts in January and Russia was awarded summary judgement, as reported. In July, Ukraine was granted a stay ahead of its appeal proceedings, which are likely to kick off in January 2018.
“The Finance Minister didn’t feel very comfortable when asked about the court case, but said Ukraine had to do what they had to do and leave what is in the courts for the judge to decide,” said the fist PM.
According to the lawyer, the case should not be a concern for investors. “Being in default doesn't legally prevent new issuance,” he said, “and obviously there are the appropriate disclosures in the bond documentation.”
Ukraine concludes investor meetings on Friday with a global one-on-one conference call. The roadshow kicked off on Monday (11 September) with meetings in London, followed by New York and Boston.
BNP Paribas, Goldman Sachs and JPMorgan are coordinating the issuance, whereas Rothschild is advising the government on its funding strategy.
The sovereign is rated B- by Fitch and S&P, and Caa2 Moody’s.