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Ukraine bond cuts cost of borrowing

June 05, 2003 | Financial Times

A dearth of high-yielding emerging market issuance in Europe helped Ukraine reach favourable terms for its 10-year dollar bond on Wednesday, the country's first new international issue since its debt restructuring three years ago.

Demand for the $800m bond totalled $4.5bn, and its yield came in at 7.65 per cent. This compares with 10.4 per cent for Ukraine's seven-year bond in 2000, when it was issued as part of a debt swap.

"It shows that there are still lots of funds seeking high-yielding issues in the region, of which there aren't many," said Timothy Ash, strategist at Bear Stearns.

The bond tightened in the secondary market soon after its launch, with the price up 1.5 points to 101.5 of face value. The bond follows the International Monetary Fund's decision to delay a $800m loan to Ukraine.

The issue comes amid a strong rally for emerging market debt since late last year, driven by globally low interest rates and scant supply.

Ukraine's debt prices have drawn support from a sharp rally in Russian bonds. But the country's improving economic fundamentals have played a part, too.

A surge in Ukraine's economic growth to 7 per cent in the first four months of this year and the government's ability to boost its foreign exchange reserves while paying down foreign debt had sent a strong signal, said Olga Pindyuk, an economist at the International Center for Policy Studies, a Kiev-based think tank.

Ukraine's finance minister, Mykola Azarov, said in a statement: "The quantity of bids proves that investors don't see any risk - neither political, nor financial."

According to Mr Ash of Bear Stearns, Ukraine's low debt ratio - its external borrowing is about 40 per cent of gross domestic product - was a key ingredient in the bond's appeal.

"At the moment, the market just looks at debt ratios; it doesn't really care about longer-term prospects," Mr Ash said. "In the longer term, there are questions about their [Ukraine's] willingness to pay, should they run into a difficult financing situation."

Ukraine is highly dependent on the economic prospects for Russia, its biggest trading partner.

Should the prices of oil and gas fall sharply, Ukraine's public finances could come under threat, as the country makes the bulk of its export revenues through the transit of Russian energy.

Rated Single B and B2, Ukraine's bonds are several notches below those of Russia. One factor adding to their risk premium is a lower degree of political stability, as the country approaches next year's presidential elections.

By Paivi Munter in London and Tom Warner in Kiev

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