Ukraine Sovereign Debt - Rada Approves Banking Law

The approval of the banking law strengthens the framework under which the NBU can declare banks insolvent, clears the path toward a new IMF program and paves the way for what is shaping up to be a string of positive developments for Ukraine's bondholders. The key provisions of the new law stipulate that:> The process by which the NBU can declare a bank insolvent or withdraw its banking license cannot be stopped or reversed by court decisions. > The law prohibits the seizure of the property and funds of a bank that is declared insolvent or in respect of which a decision has been made to revoke a banking license or to liquidate. This clause does not apply to cases when the liquidation is initiated by the bank's owners.> If the former owners or owners of such banks later prove that actions of public officials were illegal, they will be able to receive compensation only in cash. > The share price, and accordingly the damage caused to the former owner, will be determined by an international auditor. The auditor will be court appointed and must comply with certain requirements of the NBU.Hence, the new law virtually eliminates the possibility of a nationalized bank returning to its former owner, even if the wrongfulness of the nationalization is proven in court. Adoption of this law was the final and most critical precondition for the launch of the IMF new program in Ukraine. Given the news, an 18-month stand-by arrangement being launched by the end of May has become nearly certain. The program's volume may total around $5 bln, with two $1.75 bln tranches expected to be disbursed to Ukraine this year. According to Vladyslav Rashkovan, an alternate executive director at the IMF, other financing that will likely become available for Ukraine after the new program announcement includes $1 bln from the World Bank, $1.3 bln in macro-financial aid from the EU and $0.4 bln in bilateral loans. The news also clears the way for Ukraine to access borrowing from private investors. We think that given the sovereign's sizable financing needs (see our report), the new program with the IMF makes a Eurobond placement from Ukraine before the summer lull increasingly likely. If Ukraine goes ahead and taps the international capital markets, the move would further strengthen its credit profile.On the back of this news, we reiterate our recommendation opened on May 8 to buy the Ukraine 32 (see our daily story). Our optimism over the outcome of today's vote played out well, and we continue to anticipate positive news flow about Ukraine in the upcoming months. We also find the general market backdrop supportive for instruments with longer durations and higher yields.