"Its all relative," was the philosophical response of one banker when asked how he thought the Ukrainian loan market was faring this year.
Relative to the old patterns characteristic of Ukraines loan market, little has changed its financial institutions have always been more involved than its corporate borrowers, and they have continued to tap the market in the first quarter of 2008. On the other hand, global market conditions have worsened, and every deal is a hard sell. This means second and third tier bank borrowers might be forced to stay away from the markets altogether.
Relative to other CIS countries such as Russia, Ukrainian bank borrowers have done well in syndication, attracting enough participants into deals to score small oversubscriptions without having to pay big premiums compared to their pre-credit crunch loans. But Ukraine hasnt faced the same problems as Russia high deal volumes and country limits because there has been a shortage of loans so far this year, compared to 2007.
And relative to the international bond market, which not a single Ukrainian corporate or financial institution borrower has accessed in 2008, the loan market has continued just about to tick along and offer funding and refinancing opportunities.
"For Ukrainian banks, there arent that many funding opportunities other than Eurobonds and the syndicated loan market," says Vladislav Draganov, director of UkrGasBanks international business division in Kiev. "The Eurobond market is closed completely for Ukrainian banks at the moment, so its really syndicated loans that banks are focusing on."
UkrGasBank, the countrys 18th biggest bank by assets and the 11th by retail deposits, is one of many Ukrainian banks keeping a close eye on the capital markets and talking to relationship banks about plans to return to the loan market this year. Draganov says that UkrGasBank is likely to try to do so in May, to refinance a $46m loan arranged by Standard Bank and WestLB, signed in June 2007.
But, along with other Ukrainian bankers, he is also well aware of the funding difficulties plaguing lenders in the European and international markets. Nor does he underestimate how much trickier conditions are now than in the past, which could affect some banks chances of successful loan syndications.
"Some banks have limited their exposure to money markets and their participation in transactions," says Draganov. "Some have even made lending limits to include only the top Ukrainian banks. Nonetheless, the syndicated loan market is more or less alive."
How long can Ukraines banks resist the Eurobond market?
Ukrainian borrowers, never the most prolific issuers in the international capital markets, have, since the onset of the credit crisis, gone to ground.
As this report was going to press, property company XXI Century was roadshowing in London for a dollar bond, with equity warrants attached. Other than this, the last public dollar deal from a Ukrainian issuer came in November, when the City of Kiev priced a $250m 8.25% five year issue. A fortnight earlier, the sovereign priced a $700m 6.75% 10 year issue.
The last public dollar issue from a non-sovereign borrower was in July 2007, when pipe manufacturer Interpipe sold $200m of three year paper at 8.75%.
That Ukrainian borrowers have not been as prolific in the capital markets as their Kazakh and Russian peers is evident. Last year, Ukrainian borrowers issued nearly $3.4bn of dollar bonds, compared with $2.4bn in 2006.
But, with the exception of XXI Century, not a single issue has been seen from a Ukrainian borrower so far this year and the market mood is eerily calm.
Deals for Rodovid Bank and UkrGasBank have been on hold for months and few borrowers other than blue chip companies are able to tap the market for large transactions.
"The outlook for new issuance is very quiet. Russian borrowers have started to issue, and sovereigns have started issuing, so there is clearly appetite for risk," says Michael Ganske, head of emerging markets research at Commerzbank in London. "But in Ukraine, macroeconomic problems persist. Inflation has reached 26% year on year, a nine year high. And the political situation remains unclear. Investors are showing interest in the Russian blue chips, but as yet, that hasnt trickled down into new issuance from Ukraine."
Instead, investor attention in Ukraine has centred on private equity. "I was there in February and saw a lot of private equity investors showing interest," says Ganske. "Last year, Ukraine was the best performing equity market in the CIS. However, bond investors are more cautious."
With only a handful of Ukrainian borrowers with liquid curves, trade in the secondary market is thin. "Typically, Ukrainian bonds are not terribly liquid and investors tend to have a longer term perspective," says Ganske.
Ukrainian five year CDS has widened from the record tights of just over 60bp in July 2007 to more than 300bp earlier this year. It was quoted at 260bp this week.
However, in a report released earlier this year, rating agency Standard & Poors said that while Ukrainian government debt remains very low at 13% of GDP, the explosion in credit in the country is of concern. Credit has more than doubled since 2004, to 62% of GDP and Ukraines banking systems loans are among the poorest quality in the CIS, according to S&P. And although foreign investment in the banking sector has grown rapidly over the past two years, local banks still control more than 50% of Ukraines banks.
Refinancing risk in the banking system is a real concern. In 2007, external liabilities in the financial sector doubled to $28bn, or 21.5% of GDP. Some 40% of this represents short term debt.
But Ganske does not think Ukraines banks face refinancing problems in a market with little appetite for emerging market financial institution risk. "Ukraine has a low debt profile and there is not the same level of refinancing risk as in Kazakhstan or among some Russian borrowers," Ganske says.
However, foreign borrowings account for 35% of Ukrainian banking sector liabilities, a figure that sits between Russias 24% and Kazakhstans 55%. And worryingly, S&P predicts that amortisation in the banking sector will reach $11.5bn this year and of this, $6.9bn will have to be refinanced in an increasingly challenging environment.
The question for investors and bankers is: for just how long can Ukraines banks hold off?
Alive, but not quite kicking
Indeed it is. Some notable transactions have overridden the turmoil and scored small successes in the loan market despite the paucity in deal volumes compared with the first quarters of recent years.
"There is still a dearth of deals," says Eric Zimny, head of debt capital markets origination for emerging markets financial institutions at Commerzbank in Frankfurt. "The banks that have accessed the [loan] market are only the top ones Ukreximbank is a hot shot and is state owned, and Privat Bank is the biggest bank is Ukraine. These are good borrowers, quality wise."
The facilities raised by these two banks are headline-grabbers for the loan market this year, and the outcome of these deals was seen as a gauge of the state of the market.
Ukreximbank distinguished itself as a borrower to watch in 2007. It scored one of the big successes in the loan market in March last year with a $100m facility that was increased to $325m. That deal also set the previous benchmark for the tightest priced loan to a Ukrainian bank borrower, with a margin of 80bp over Libor.
This year, the refinancing of that deal was oversubscribed, increasing it to $345m, and Ukreximbank again paid a margin of 80bp. Lenders to Ukraine reacted with mixed emotions at the result the oversubscription was a good sign given that market conditions have deteriorated sharply since last year, but in the past, the oversubscription would probably have been greater.
"This is a good result. Although, amount wise, in a healthy market environment, the company would be eligible for much more," says Zimny. "More remarkable is the pricing with a margin of 80bp over."
That Ukreximbank managed to secure an oversubscription in a difficult market and at a margin of 80bp is partly, according to the banks deputy chairman Nickolay Oudovichenko, a testament to its strong relationships.
"Given that we have built positive and stable relationships since 2000, the response to this transaction is a result of a fruitful co-operation with our counterparties in other businesses," says Oudovichenko. "From this relationship, they realise that we are an absolutely reliable counterparty and serious about our growth and our quality."
Privat Bank managed to secure an even tighter margin on its $200m loan with pricing of 75bp over Libor undercutting the previous benchmark set by Ukreximbank.
BayernLB, Bank of Tokyo-Mitsubishi UFJ and UniCredit arranged the loan, which closed fully subscribed but without scoring an oversubscription another example, then, of a borrower which in the past would have been able to raise a lot more from the market.
Pile on the fees
For some smaller Ukrainian banks, it will be a lot harder to come to market.
"Smaller Ukrainian banks who wanted to come to the market this year for the first time are having to wait," says David Savin, senior vice president within Standard Banks debt capital markets and loans division in London. "Their plans were formed last year on the back of the success of Ukrainian banks getting larger and larger commitments from the market. These plans have had to be put on hold now as lenders are unwilling to open up new lines at present."
Some smaller banks have managed to come to market, though. Bank Forum, for example, signed a $115m loan in April this year after the deal was increased from $75m.
But apart from being foreign-owned Germanys Commerzbank has a 60% stake in Bank Forum the borrower also made sure the fees offered on the deal were big enough. The facility was arranged by BayernLB and Fortis Bank as the initial mandated lead arrangers and bookrunners, and Raiffeisenbank ZentralBank Oesterreich as an MLA. The deal carries an initial margin of 160bp over Libor.
The all-in price on the loan was a lot higher, however, something which the borrower had been reluctant to disclose. According to bankers invited to join the facility, the top ticket on offer for Bank Forums facility paid 145bp, bringing the all-in pricing to 305bp. The borrower had in the past paid a lot less than it did this year on its last $90m facility, signed in October 2007, the all-in margin stood at 235bp, even though the initial margin was 165bp, which is roughly in line with the margin Bank Forum paid this year. All-in pricing has gone up now, whether or not the margins on a deal reflect this trend.
"We are definitely away from the aggressive downwards trend on pricing from last year," says Zimny at Commerzbank. "Only the big banks can afford to push pricing down."
Borrowers flexibility when it comes to margins may come in very handy if they are indeed planning to come to market this year. Many are still very price-conscious, however, and would be unwilling to come to market if the price hike became too unreasonable.
"We are not in a position to pay any price to do a syndicated loan we have always had benchmark pricing and we have a good liquidity position at the moment," says Oudovichenko at Ukreximbank. "We can be flexible, but always provided it is in line with our view on the market price."
Ukreximbank is in the enviable position of being able to fund itself in other ways doing bilaterals, for example. This, however, is an expensive option, and not one many of the smaller banks may be able to opt for.
"It is also difficult to do bilaterals," says Zimny. "Pricing is much higher and as many names cant be traded, these banks need to provide some collateral, and that is not something which smaller banks can necessarily provide."
Local banks may, however, find some consolation in the prognosis put forward by lenders and bank analysts that the Ukrainian banking system is far better placed than many of its counterparties across the CIS. In terms of refinancing debt, for example, many Ukrainian bank borrowers managed to secure tenors of two or three years when they came to market in 2007, allowing them to stay away from the markets this year if they had to.
Moreover, the countrys financial institutions have never been as dependent on international capital markets for their funding as banks in, for example, Kazakhstan. "In 2006-2007, Ukrainian institutions have not accessed the international markets that much, and are not dependent on them for their funding plans," says Dmitry Sentchoukov, an emerging markets strategist at Dresdner Kleinwort in London. "The need to refinance varies from bank to bank, but the way it seems now, assets and liabilities of most banks are balanced in terms of maturities."
UkrGasBanks Draganov is also keen to say that, despite having plans to tap the syndicated loan market this year, his bank is not completely dependent on international funds, and can find other ways of funding itself.
"As of January 1 this year, our share of international borrowings was less than 40%. After a share capital increase of $30m this year, this has diminished further," he says.
Calling all corporate borrowers
Whatever the strategy, bank borrowers in Ukraine have continued to keep lenders busy, just as its corporate borrowers have continued to remain quiet.
The biggest facility for a corporate borrower launched to date in Ukraine is a $1.5bn loan for mining and metal company Metinvest, which came to the market in August 2007. It was the only deal in the country to ever exceed $1bn but there has not been a deal since.
In fact, only a handful of Ukrainian corporate borrowers have used the international capital market. System Capital Management (SCM), one the countrys biggest conglomerates, with operations in banking and insurance, telecoms and mining, is one of them. The company has tapped the market before, recently through Metinvest, which holds the companys metal and mining assets, but it is yet to make its mark this year.
"[For Ukrainian corporate borrowers], their ability to raise financing will probably continue to be fairly limited, given market concerns about how the crisis will play up," says Sentchoukov at Dresdner Kleinwort.
But aside from the current market turmoil, one reason why corporate borrowers have not been as prolific as their counterparts in Russia and other CIS countries until now is Ukraines uncertain politics. Last years presidential election volatility has not been repeated but Ukraines politics is still regarded as obstructive to more comprehensive financial market development (see Overview on p2).
For now, lenders are focusing on the regular, well known borrowers such as SCM and Industrial Union of Donbass (ISD). Its subsidiary, steel company Dunaferr, tapped the loan market in November last year for $400m, and ISD came for $250m in February this year. Lenders are not holding out, however, for a huge increase in the number of corporate borrowers to sign syndicated loans.
Ukraine may offer more value than Russia in torpid market
The credit crisis has put Ukrainian securitisation in the freezer.
No deal has been publicly marketed since the countrys first, for Privatbank, was launched in February 2007. The 210bp spread on the triple-B rated senior tranche of Privatbanks Ukraine Mortgage Finance No 1 seemed wide at the time, but any deal launched now would require many multiples of that number. According to one emerging markets banker, indicative secondary spreads for the transaction are over 900bp.
As in Russia Ukraines securitisation market resembles a smaller and slightly delayed version of Russias the credit crunch hasnt led to a complete halt to securitisation issuance, but issuers have scaled back their ambitions, put planned deals on hold and turned to private placements.
"We do have quite a few mandates," says Francesco Dissera, head of structured finance for southern and eastern Europe at UBS in London. "There are one or two originators who are looking at private deals although they would be smaller than the Privatbank deal."
Dissera expects some private deals to emerge in the next month, with the most likely candidates being mortgages and car loans.
"The top five or six banks could do deals of $150m to $200m, but the top 10 banks could do $60m or $70m deals, which they would be in a private placement," says Dissera.
With mortgages yielding 12%-13% and car loans 30% or more, the latter asset class will look a lot more attractive for issuers. Nevertheless, some may choose to offer notes at a discount to raise funds.
One of the key differences between the Russian and Ukrainian markets is that even at the new levels, securitisation still could offer attractive pricing compared to the senior unsecured market. Russias comfortable investment grade rating means that many banks can raise money cheaply in the unsecured market, whereas Ukraine is rated B1/BB-/BB-.
This means that securitisation with some form of enhancement such as political risk insurance can appeal to a much wider investor base than unsecured bonds, while still offering a hefty spread.
Like Russia, however, Ukraines banking system has a large amount of foreign ownership, and most banks have relied on their parent banks for funding during the credit crisis.
For instance, International Mortgage Bank sidelined a planned securitisation after obtaining a capital injection in late 2007. Once market conditions improve, however, the bank will return the International Finance Corp provided a $75m warehouse facility in April."The market is substantially closed, but private transactions can be done as long as the deals are not big, the spread is right, and the issuer is patient," says Dissera.