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Ukraine corporate bonds hit by fear of devaluation, capital curbs

Source: Reuters - Thu, 5 Dec 2013 10:49 AM
Author: Reuters
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* Mass protests in Kiev unsettling markets

* Central bank may struggle to keep currency peg to dollar

* Ukraine corporate bond prices down 2-3 points in days

* Devaluation or capital curbs could cause bond defaults

By Sujata Rao

LONDON, Dec 5 (Reuters) - Dollar bonds issued by Ukrainian companies back in the easy-money times are taking a hit on doubts over the country's solvency and fears that a currency devaluation or capital curbs might propel firms into default.

Mass protests against the government's decision to spurn a cooperation deal with the European Union in favour of closer ties with Russia are inflicting more damage on an economy already in recession. And unless external aid materialises, the central bank, with just $20 billion in hard currency reserves, may struggle to hold the hryvnia's peg to the dollar.

Corporate bond prices have dropped 2-3 points across various maturities in recent days, some hitting lows they haven't visited for many weeks or months.

"Ukraine's problems are more on the sovereign side than on its corporate sector," said Apostolos Bantis, a corporate credit strategist at Commerzbank in London. "(But) a default scenario of the sovereign would have major spillover effects."

For all that, few believe in a looming spate of defaults. Ukrainian companies have just $10-$12 billion of Eurobonds outstanding, Bantis estimates, though hard-to-track syndicated and bilateral loan volumes are much higher.

Moreover, bonds worth less than $2 billion fall due in 2014, the biggest being a $1.6 billion issue by state energy firm Naftogaz.

But the dangers are clear; a prolonged period of unrest that hurt company profits would jeopardise companies' ability to repay debt, and currency devaluation would make it costlier to service dollar debt.

And just the existence of such risks might make creditors reluctant to lend companies more cash to repay maturing debt.

Already last week, mid-sized Finance and Credit Bank became the first casualty of the jittery markets when it asked to restructure a $95 million bond maturing in January 2014. A company spokeswoman blamed market conditions.

"It has been very difficult for Ukrainian companies to issue new debt on foreign markets," she said.

As a result, bonds from even more robust companies such as poultry firm MHP and steelmaker Metinvest are trading around their lowest since mid-2012, while a 2014 bond from state-run Naftogaz is at late-2011 lows.

Ukraine's yield spreads over U.S. Treasuries on JPMorgan's CEMBI Broad corporate bond index have blown out 100 basis points in the past week. They are 334 bps above end-2012 levels, according to JPM's Global Index team, while the underlying index has widened only 18 bps.

CAPITAL CURBS?

A major worry for investors is that authorities will resort to capital controls to defend the hryvnia, in essence preventing hard currency from leaving the country. Such a move would affect even coupon payments to bondholders.

"Stricter capital controls and some form of a moratorium on international payments could be a real possibility next year if the country remains cut off from the capital markets," JPMorgan told clients, advising caution on Ukrainian corporate debt.

Bond spreads indicate that the probability of default in the next 12 months ranges from 25 percent for state-run energy firm Naftogaz, to 15 percent for MHP, according to calculations by Okan Akin, a strategist at asset manager AllianceBernstein.

"Main exporters such as Metinvest and Ferrexpo with revenues in hard currency should be fine, in theory. But during the Argentine crisis even exporters defaulted on debt because they were not able to transfer money out of the country," Akin said, referring to the South American country's 2001 default.

Most, however, think Ukraine can struggle through until 2015 elections, after which it can knuckle down to an International Monetary Fund aid programme. That will re-open bond market access for the government and companies.

Max Wolman, a fund manager at Aberdeen Asset Management, says most firms without short-term debt will weather the storm. He is holding on to bonds in poultry farmer MHP for instance.

"People will still need to eat chicken. It's the (cheapest) form of protein, so demand will be there, and they are increasing exports to the Middle East and Russia," he said.

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