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Eavex Ukraine Fixed Income Weekly: Feb 20

Trends

Ukrainian sovereign Eurobonds were steady last week, mostly ignoring the widely-covered developments regarding the railroad blockade of the Donbass occupied territories by rogue nationalist paramilitaries. The blockade has already caused an energy emergency situation by interrupting coal supplies. President Poroshenko has chosen public relations over force in dealing with the ostensibly pro-Ukrainian paramilitaries, warning on television about the severe economic consequences of this action for the entire country. The radicals claim that they are trying to stop all trade operations between Ukraine and the DNR/LNR separatist-occupied territories. However, we suspect the blockade is intended for political and/or monetary gain, and we believe a solution will be found shortly.

The longest outstanding sovereign issue, Ukraine-27s, were unchanged at 94.5/95.5 (8.6%/8.4%) while the shortest bonds, Ukraine-19s, edged up 0.2% to 100.3/100.8 (7.6%/7.4%). The VRI derivatives (linked to Ukraine’s future GDP performance) rose 1.6% to close at 30.5/31.8 cents on the dollar after the government reported that the country’s GDP grew 2.2% in 2016, a somewhat better-than-expected performance.

The new Kernel-22s gained 1.2% 103.2/103.8 (8.0%/7.8%) and established their early pattern of trading notably higher than Ukrainian sovereigns. On the downside, DTEK-24s lost 1.6%, finishing at 90.0/91.5 (12.7%/12.4%) as the company is the primary victim of the coal supply interruption.

Quasi-sovereign UkrEximBank-25s climbed 0.7% to 98.2/99.3 (10.1%/9.9%) and OschadBank-25s added 0.8% to 98.3/99.3 (9.9%/9.8%). The NBU said it forecasts that the banking system will see a net profit in 2017, pointing out that among positive trends for the entire banking system was growth in net interest income. The combined financial result of Ukraine’s banks in FY16 was a net loss of UAH 159bn (USD 6.2bn), but the figure was grossly exaggerated by the nationalization of the country’s largest bank PrivatBank, which accounted for most of the system-wide red ink, having lost UAH 135bn (USD 5.3bn).

The yield on the government’s UAH-denominated VAT-19s (a benchmark for domestic interest rates) decreased by 25 bps to bid/ask of 16.20%/15.75% after the Finance Ministry managed to sell 3-year UAH-denominated bonds at 15.50%.

On the currency front, the NBU intervened to prevent the hryvnia from gaining too strongly against the dollar, keeping the rate above the 27 UAH/USD level. The hryvnia strengthened by 1.0% to 27.05 UAH/USD over the week.

You can receive additional details about developments in Ukrainian fixed income from the Eavex Sales Team at [email protected].

Highlights

- G7 Calls for End to Donbass Coal Blockade by Rogue Nationalists

- Gov’t Ramps Up Nuclear Output Amid Coal Blockade

- UkrStat: Full-Year GDP Growth Was 2.2% in 2016

Eavex Capital welcomes any questions or comments you may have regarding our research products.
Please contact our office in Kyiv at 380-44-590-5454, or by email:

Alexander Klymchuk, Head of Sales, [email protected]
Dmitry Churin, Head of Research, [email protected]