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8.5 Fixed income
Ukraine’s Eurobonds were on a wild ride in March as the crisis hit full force and it appeared that the government would fail to close a new $5.5bn Extended Fund Facility (EFF) with the IMF that could have ended in default on its international debt. Yields on Ukraine’s 2028 bonds soared 150bp to over 11%. But at the last moment the Rada passed the necessary laws to secure a new IMF deal and yields fell back 1.2% to under 10% again.
As a result, the yield of securities maturing in 2023-2025 decreased to 9.8-9.9% per annum as of March 31, with maturity in 2026-2027 it decreased to 9.2-9.3% per annum, and long-term securities with maturity in 2032 decreased to 8.5%.
Higher yield on short-term securities: due in September 2020 amounted to 11.9%, in 2021-2022 amounted to 10-10.4% per annum.
In addition, Ukraine’s warrants rose by 11.6% on Tuesday, March 31. Their current value is 74.8% of the face value, although a decade ago it fell to 50% of the face value.
With Ukraine’s exchange rate, bond yields and prices on GDP warrants back to the levels of last summer, Timothy Ash suggests the government buy back the warrants. These 2015 warrants threatening to cost Ukrainebns of dollars in the 2020s. He writes from London: “A buy back would have cost $3.7bn one month ago. Now it’s down to $2.4bn.”
Studying the diverging paths of Ukraine and Pakistan bonds in the emerging market sell off, Ash concludes that Ukraine – without an IMF deal and without its financial ‘A Team’ – is paying a 150 basis points penalty. One month ago -- before the coronavirus market meltdown and Ukraine’s cabinet purge – Ukraine’s 8-year government bonds were trading at yields of 5.62%. “Now it is 9.4% and heading back into double digits,” he writes. “The cost was likely 150bps on borrowing costs,” he writes. “On $84bn of debt, that's $1.26bn.”
The domestic bond market has also been hit but not badly. The Ministry of Finance has suspended auctions in the last week of March due to the extreme volatility, but the volume of outstanding bonds has continued to rise in March.
While there has clearly been selling but foreign investors there is no rush to the exit yet. The foreigner’s share of total bonds outstanding peaked in February with non-resident investors holding a total of 15.7% of outstanding paper, but that fell to 13.9% the very end of March.
Now the new IMF deal looks an almost certainly bond investors should be reassured and should start buying again, proving Ministry of Finance with an increasingly important source of financing.
49 UKRAINE Country Report April 2018 www.intellinews.com
