Ukraine bond investors remain anxious despite relief rally
Wednesday, 26 February 2014 00:00
LONDON (Reuters): While bond markets have reacted jubilantly to the possibility of Western aid for Ukraine, big-name investors are worried about how fast Kiev can secure a rescue and whether an IMF bailout may reschedule its debts.
The faith of funds such as Templeton, Fidelity, Amundi, ING and Stone Harbor Investment Partners in Ukraineâ€™s ability to repay its debts seemed to have been vindicated late last year when Russia offered Kiev a $15 billion rescue.
That deal is doubt following the weekend overthrow of Moscow-backed president Viktor Yanukovich, and Ukraineâ€™s new authorities have turned to the West, appealing for urgent financial help to avoid a default.
Hopes for a deal with the International Monetary Fund boosted Ukrainian dollar bonds by 5-9 cents across all maturities on Monday, reducing the countryâ€™s bond yield premiums to U.S. Treasuries by a half percentage point on average, according to JP Morganâ€™s EMBI Global index.
This offered some relief to bondholders whose punt on one of the highest-risk emerging markets has fared poorly this year. Ukraine, along with Venezuela, is this yearâ€™s worst bond performer, recording losses of 13 percent by end of last week on the JPMorgan index.
Bondholdersâ€™ worries are by no means over. Ukraine is still a risky call. It is not out of woods as there is a lot of short-term debt coming due, said Sergei Strigo, head of emerging debt at Amundi, which has a total of $1 trillion under management. If you look at the bond curve you can see it still indicates potential for (debt) restructuring.
Normally, it is costlier to buy longer-term debt insurance and yields on longer-dated debt are higher than on bonds maturing in the near future. In Ukraine, the reverse is true and this is making investors nervous.
Acting President Oleksander Turchinov said on Sunday that the Ukrainian economy is heading into the abyss and is in a pre-default state.
The probability of default is as high as 52% in the next five years, data provider Markit estimated, basing its calculations on prices for credit default swaps.
Amundi owns Ukrainian debt but cut exposure after the Russian bailout deal, which Moscow subsequently suspended, especially to bonds maturing in 2014. Its holding no longer exceeds Ukraineâ€™s 3% weight in the index.
Strigo said investors were heartened by the end to the violence that led to Yanukovichâ€™s fall and the interim governmentâ€™s plans for swift elections and to seek international help.
The chances of quick reform and macro-adjustment as per IMF requirements have improved, he said, noting the hryvniaâ€™s effective devaluation that was a major IMF requirement.
But the big questions are will there be enough money And second, will that money come in time The bond curve is still indicating potential for restructuring.
The IMF agreed a $15.5 billion loan for Ukraine in 2010, but suspended the deal last year after Kiev failed to implement the required reforms, which included removing gas price subsidies and freely floating the currency.
Ukraine has said it needs around $35 billion in foreign assistance over the next two years and it asked to receive the first part of the aid in the next one to two weeks.
The government must repay $6.5 billion to creditors in 2014, and needs a further $6.5 billion to fund its balance of payments gap while it is also $1 billion in arrears to Russia for gas supplies, according to estimates from Commerzbank.
This would more than wipe out central bank reserves, which Goldman Sachs reckons are down to $12-$14 billion.
Bondholders believe that an IMF package would benefit Ukraine by forcing the much-needed reforms, but a deal may take time to piece together and could prove unpalatable to the countryâ€™s new rulers who face elections at the end of May.