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Ukraine: Investors just can't get enough

June 05, 2003 |

Amount: USD 800 mln,
Maturity: July 11th, 2013
Yield: 7.65% p.a.
Rated B by S&P and B2 by Moody’s.
Lead managers: Dresdner KW, JP Morgan and UBS Warburg.

Unsurprisingly, with an order book of almost USD5bn, the deal was a total blow-out. The grey market price pre-launch was already trading at a significant premium, but with the inevitable heavy scaling back of customer orders, the price rose to a premium of 101.50-101.75 by the close of business – a bid yield of 7.44pc.

UBS Warburg reported that the borrower was extremely pleased with the transaction, achieving a much tighter spread than was initially discussed and a longer tenor. Whilst with hindsight the pricing could have been tighter, for a B2/B credit, the yield already looked aggressive. The size of the order book meant that the price was only going to go in one direction.

With deals like this it’s difficult to please everyone, with one investor describing his response to his allocation as ‘under-whelmed, under-allotted, oversubscribed but over par’; almost inevitable as there are simply not enough bonds to go around.

Investors reported that whilst there is concern with the political situation in the country, and little hope that the relationship with the IMF will be repaired soon, the economic fundamentals appear to have turned the corner. The solid GDP growth over the last three years has helped the country to build up sufficient foreign reserves to facilitate the servicing of its debt.

The economy has become the driving force with the country perceived to be riding on the coat-tails of Russia. On that basis, some investors believe that Ukraine may have even further to go with the Russia 5pc due 2030 yielding around 6.75pc on the bid and the Russia 8.25pc due 2010 around 5.22pc.

Market sentiment has staged a significant turnaround towards the Ukraine this year as it prepares its first new dollar issue since the country's debt restructuring in 2000. After the IMF stopped lending to the country last year and delayed a USD800m loan, things looked bleak but attempts are now being made to restore the relationship. This deal aims to plug the financing gap.

The country’s existing 2007 dollar bond, issued in a commercial debt swap in 2000, has tightened in steadily over the year from bid around T+740bp over the curve to around T+566bp today, helped by improving economic fundamentals and excess market liquidity. Unsurprisingly, its new deal is oversubscribed and standing at around USD4.9bn as the market took further comfort from the country successfully servicing its debt obligations on its 07 bond in March.

The price guidance of 7.65pc area has come in from an initially marketed level of 7.75pc and should certainly please Ukraine. Government officials have previously said they were seeking to place the new issue at a yield of around eight percent. Earlier in the year, it indicated it wanted to borrow at rates below nine percent.

Ukraine has enjoyed a steady economic recovery over the past three years. Gross domestic product is expected to grow by about four percent this year after a 4.6pc rise in 2002. Hard currency reserves are also slowly climbing to stand at a record high of USD5.174bn.

However, Ministers have delayed privatisation and reforms of the key energy and banking sectors and the IMF has still not agreed to resume lending. One would normally expect these factors, and upcoming presidential elections due in 2004, to weigh on its new issue. But market momentum is such at the moment that investors are happy to ignore the downside.

In May, S&P said that the country’s single-B rating with stable outlook reflects positive adjustments to the government's annual debt-financing programme and attempts to repair relations with the IMF. Although the IMF stopped lending to Ukraine last year, the government has since tried to repair ties, sending officials to Washington in April.

IMF Senior Resident Representative to Ukraine, Lorenzo Figliuoli, has positively appraised certain aspects of the Ukraine's attempts to restore cooperation with the Fund. However, he emphasised recently that the Ukrainian authorities have a lot to do for the talks to be a success. Figliuoli noted achievements in certain directions, pointing out the reduction of VAT arrears and the government plans to cancel VAT preferences. He is also positive of the shift of the second increase of a minimal wage until December this year.

The proceeds will be used to finance the expansion of the subway, develop the transport sector and support culture and arts.


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