The new government in Ukraine has raised investors' interest in Eurobonds from the country to a new height. But the demand has had hardly any outlets — there was only one $100m issue in the first three months of 2005. Signs in April, however, suggested issuance may pick up, as long as the wider bond market stays calm. Kathryn Wells reports.
When Ukraine's leading mobile phone company, Kyivstar, launched a $265m five year Eurobond in July 2004, bankers were impressed at the 10.375% yield at which it was priced. They considered it an impressively low yield, at a time when emerging market credits were suffering from the fallout of the Russian government's hounding of Yukos.
|Leading bookrunners of Ukrainian Eurobonds (January 1-December 31, 2004)|
|Rank||Bank||Total ($ m)||Issues||Share %|
|1||Dresdner Kleinwort Wasserstein||641.67||4||29.74|
|5||Credit Suisse First Boston||166.67||1||7.72|
Less than nine months later, Kyivstar came back to the market with a $175m seven year issue. This time, the same lead managers, Citigroup and Dresdner Kleinwort Wasserstein, priced it at an eye-catching 7.75%.
This issue came in mid-April, after more than a month of market volatility had rendered the international bond market all but closed for most emerging market borrowers. On the same day as Kyivstar's issue, Uruguay was forced to abandon its attempt to re-enter the markets after defaulting on its debt two years earlier.
But in this turbulent atmosphere, Kyivstar's first deal was trading as tight as 7.17% by the time the new issue was priced.
"Kyivstar is one of those rare credits in our region that is a perfect fit for emerging market, high yield and retail investors," says Carlyle Peake, head of emerging markets syndicate at DrKW in London.
"This transaction was certainly a follow-up to its five year transaction from last summer that had an incredible following across US, Europe and Asia. The fact that it could assemble such a sizeable book in 24 hours, increase the transaction and price at the tight end of talk despite continued volatile market conditions demonstrates this."
Kyivstar had chosen its lead managers more than six weeks earlier, but bided its time as emerging market bonds went into a protracted decline in March.
"The company was very sensible and waited on the sidelines during the recent volatility," says Chris Hewitt, head of emerging market syndicate at Citigroup in London. "It was then ready to come to market very quickly when the situation improved, and even though it quickly turned sour again we saw that for a good and scarce name such as Kyivstar, investors are prepared to buy their paper even in more difficult markets."
Kyivstar will use about $40m of the bond's proceeds to repay debt maturing this November, and the rest will pay for network equipment and be used for general corporate purposes.
"Kyivstar's subscriber base is growing rapidly and it needs to finance the expansion of its infrastructure," says Hewitt. "The company saw that it could combine the refinancing of a small amount of debt falling due later this year and its need for cash in one bond."
Government stays away
Ukrainian borrowers produced a bumper crop of Eurobond issues in 2004, but after disputed presidential elections at the end of last year, they have been waiting for volatility to subside under new president Viktor Yushchenko, before issuing again.
Ukrainian 10 year sovereign spreads have tightened sharply in 2005, to 180bp over Treasuries in February, although they then widened to around 220bp by mid-April as the wider market sold off.
"As the pace at which spreads recovered after last December's elections showed, investors continue to like Ukraine and its growth story," says Peake.
The problem for investors is a shortage of deals. The government is only likely to issue one new deal in 2005. No timing has yet been given.
"The government has lowered the amount it plans to borrow internationally in the revised budget," says Serhiy Shvets, head of fixed income research at Ukrsotsbank in Kiev. "Yields are equal on the domestic and foreign markets, so there is no reason to issue so much internationally. This year, the government will likely sell one deal of $500m-$600m, or get this sum from the World Bank."
Bond prices look sustainable, analysts say, though some argue that they are supported by technical factors rather than pure fundamentals. "We expect the Ukrainian sovereign spread to remain in the range of 200bp-250bp over Treasuries," says Shvets. "But if the Fed continues to raise rates, then our borrowers will feel this influence."
One result of the disputed elections was that Ukrainian debt began to be traded more actively than it had in the past.
"There are several groups of Ukrainian Eurobonds that trade differently," says Shvets. "For one group, which includes names such as Kyivstar and Naftogaz, the companies' bonds are well traded. This was especially the case after the events of late last year, when trading volumes rose by as much as 10 times. Levels now are still higher than before."
The City of Kiev is the only Ukrainian municipality that has issued Eurobonds, but several other cities are considering issuing. Six, including Kiev, are able to issue bonds under current legislation, either domestically or internationally. The others are Dnipropetrovsk, Donetsk, Kharkiv, Odessa and Zaporizhia.
"Among other restrictions, municipal borrowers must have a population of at least 800,000 to be able to issue," explains Armen Khachaturyan, a partner at law firm Shevchenko Didkovskiy & Partners in Kiev. "There has been a suggestion that some of the cities that meet this criteria but do not need to raise as much as $100m — generally the minimum level for Eurobonds — create a pool and issue together."
State companies shine
Another issuer that has benefited from investors' enthusiasm for Ukrainian bonds in the last six months is Ukreximbank, the state export-import bank.
"Last year saw our first visit to the international capital markets," says Nickolaj Udovichenko, deputy chairman of the board at Ukreximbank in Kiev. "We planned a $100m three year Eurobond but because we received such strong demand, we increased this to a $150m five year deal, with a 7.75% coupon. The bond, arranged by Dresdner Kleinwort Wasserstein and UBS, now acts as the best benchmark for all Ukrainian banks and corporates."
As a government agency, Ukreximbank is able to achieve tighter pricing than private sector issuers.
"After the turbulent months at the end of last year, we felt a more positive sentiment to Ukraine at the beginning of 2005, and we tapped the deal for $100m," says Udovichenko. "The book was again 10 times oversubscribed. We were able to do the deal in three hours by phone — that's why there was no Asian participation. Instead, 38% was sold to US offshore accounts and 30% to the UK. The yield was 7.04%, even better than the original level."
Ukreximbank plans to become a regular borrower in the international market and is planning its strategy accordingly. "Next time we go to the capital markets, we will be able to get a better quality of money," says Udovichenko. "We will be able to get a longer maturity, such as seven years, and we are interested in accessing the Rule 144A market this time. We may also look to set up a multi-currency MTN programme."
The bank's first issue from the programme is likely to be this year, assuming that market conditions remain encouraging in the face of rising US Treasury rates.
"If the situation is favourable on the capital markets this year, then we will plan new issues," says Udovichenko. "We believe we must build a good relationship with investors in the market."
Ukreximbank has already shown that it is prepared to use innovative structures. In February it launched Ukraine's first ever lower tier two capital issue. "We sold the $40m subordinated issue to create additional flexibility," explains Udovichenko. "The majority of investors in the subordinated deal also took part in our senior issues."
Naftogaz Ukrainy, the vertically integrated state oil and gas monopoly, was the other Ukrainian company outside the banking sector that issued a Eurobond in 2004. It is Ukraine's largest company — its sales in 2003 made up nearly 10% of GDP.
Naftogaz priced a $500m deal, arranged by ABN Amro and increased from an original target of $300m, in September. But it is less likely to return to the capital markets this year, since Deutsche Bank granted it a Eu2bn bilateral loan in March.
Banks get ready to issue
Ukraine's banks are again gearing up to issue. Both Ukrsibbank and Ukrsotsbank have issues tentatively scheduled for May.
Ukrsibbank has one deal outstanding, a $100m issue launched in 2004 that matures in April 2007. That bond was priced to yield 10.5% and was trading at a yield of around 10% in April.
Ukrsotsbank mandated ABN Amro for a debut Eurobond last spring, but chose to postpone the issue in favour of a syndicated loan in August.
But bankers do not expect a big jump in Ukrainian Eurobond issuance this year. "Overall supply from Ukraine could be quite limited this year, especially if markets continue to prove hard to gauge and rates are heading higher," says Peake. "We may see some new financial and corporate names but volumes will not compete with those from Russia."
Ukraine's new government has been quick to stress that the country sees its future firmly within Europe and the European Union. As a result, bankers say, the traditional bias towards issuing in dollars may begin to change.
"It absolutely makes sense for Ukrainian issuers to consider euro denominated debt, and the sovereign is a very good candidate for this," says Peake. "Latin American credits have been the first emerging market issuers to penetrate the euro markets and there is definitely room for more names."
After two securitisations in Russia last year, bankers predict that asset backed issuance could be about to take off there. But securitisations are unlikely to become a reality in Ukraine just yet.
"In terms of securitisation, a true sale opinion may be issued," says Khachaturyan. "But the question is about what assets might be securitised. Many Ukrainian loans are denominated in dollars, for example for funding car purchases, so this bypasses the issue of convertibility of the currency for a foreign SPV. However, it may take another year or two before we see securitisations."