Ukraine Fixed Income - Sovereign Tapping the Euro Market

The books are open for a 10y euro-denominated benchmark-sized 144A/Reg S transaction. The IPT was provided in the 5% area, and the guidance came out in the 4.75% area. The pricing is near fair levels, in our view.> The upside is limited from here. Ukraine has just one outstanding euro-denominated issue on the Eurobond market: the Ukraine 26, which is yielding 3.8%. This corresponds to a 430 bp premium over Bunds with a comparable maturity. Ukraine's 4.75% yield in the 10y tenor would imply a 500 bp spread over 10y Bunds and a 92 bp slope on the 6s10s curve interval. This may not appear particularly excessive compared with the 6s10s slope of Egypt's curve, which extends to 150 bps.> The rate structure of Ukraine's dollar-denominated yield curve suggests additional guidance. The 6s10s yield differential on that market amounts to 85 bps. In this context, it is worth noting that the Bund curve is 7 bps steeper on the 6s10s interval than the US Treasury curve.> Widespread and cross-market interest toward Ukraine country risk is another important factor. In light of the current general market overweight in Ukrainian Eurobonds, and given ongoing inflows into Ukraine's domestic debt market, the healthy investor appetite for the Ukrainian primary issuance should not have come as a surprise. The order book reportedly exceeded EUR4.5 bln. > Ukraine has opted to move early with this year's external borrowing plans. The current transaction could see the Finance Ministry raise EUR1 bln. This would double the sovereign's outstanding paper on the euro market and would also add another point to the sovereign curve, which is the benchmark for corporates. This year, Ukraine plans to borrow externally the equivalent of $4.9 bln in gross terms. Our baseline assumption for this year is that Ukraine will raise the equivalent of $3 bln on the Eurobond markets.