Volodymyr Vysotskyi, Ukraine’s top negotiator for the sovereign debt portfolio, steered the nation through tempestuous market waters in 2007, dictating demanding pricing terms to a faithful investor base on the countries’ own terms. And when premiums spiked, he prudently changed track and grabbed the chance to launch a deal quickly at a reasonable price, just as the markets began to crumble.
Ukraine’s first foray into cross-border markets last year came in June – during a period of acute market distress with a sell-off in US Treasuries and anxiety over China’s stock market bubble. Nevertheless, Ukraine launched a 6.385% $500 million, five-year bond issue that month – its lowest ever coupon for a dollar denominated issue and the tightest spread at 130bp over US Treasuries.
The finance ministry had initially opted for a $700 million, 10-year issue to meet the country’s $1.2 billion external funding requirement for the 2007 fiscal year – complemented by an expected $500 million World Bank loan. But Vysotskyi explains that the authorities were opposed to paying any premium to its last 10-year issue in November 2006, which yielded 6.58% at launch.
After consulting with joint bookrunners Citi, Credit Suisse, Deutsche Bank and UBS, he recommended the bond should be downsized rather than postponed. “We realized that putting off borrowing for later periods is not applicable in connection with the rise of its cost in the capital markets, but the positive trend towards progressive decrease of Ukraine Eurobonds’ yield in primary placement had to be preserved and extended,” he tells Emerging Markets.
Delaying Tactics
The initial guidance at the end of May for a 10-year issue would have secured a spread of 120bp over US Treasuries. But in the first half of June due to market distress and the T-bill sell-off, the bond would have come in at 160bp – a yield of 6.77%. Under pressure from the finance ministry to secure ever-cheaper funding, Vysotskyi decided to delay the issue for a week and opted for a five-year deal, which eventually priced 19.5bp inside the sovereign’s 2016s’ reoffer yield – ensuring a competitive final spread of 130bp.
Investors clearly felt the rationale was reasonable after the Reg S 144a Eurobond attracted $900 million in demand, with US investors taking 41% of the notes and UK accounts 32%.
So a deal that suffered from bad headlines after its scale-down and reviewed price guidance was in the end fairly and safely executed, tightening around 2bp in the initial aftermarket.
Vysotskyi deserves respect for trying to hold onto the principle – held by many emerging issuers – that developing countries do not deserve to incur premiums sparked by crises outside their own backyards. Instead, the sovereign paid a fair price within its own dollar-denominated yield curve, correctly banking that its faithful band of investors would come to the rescue.
Not bad considering the ongoing political turmoil in Ukraine that saw the dissolution of parliament and calls for a fresh election, bringing the so-called Orange Revolution to the brink of collapse.Vysotskyi denies this instability added to the sovereign risk premium. “Investors are used to seeing political uncertainty in all countries at some point in time,” he says.
Understanding the changing dynamics of the fixed-income universe, Vysotskyi spearheaded a swift and nifty deal in November in a rapidly deteriorating market. He opportunistically grabbed a quick market opening to complete the country’s funding requirements for the year.
Ukraine issued a $700 million, 10-year Eurobond that was impressively executed in just 12 hours, attracting an eye-opening $2.5 billion via joint bookrunners Citi, Credit Suisse, Deutsche Bank and UBS. But despite the large order book, he prudently stuck to the targeted $700 million size.
The bond was issued at par, at the tight end of 6.75–6.875% guidance – a spread of 239bp over US Treasuries in a tumultuous week that saw global equity markets erupting and Citigroup’s $11 billion write-downs.
Vysotskyi deserves clear credit for not sitting passively on the sidelines and instead dictating the timing of the sure-footed transaction. “The ministry of finance chose to monitor the situation in the market, were prepared to enter the market rapidly and without the usual roadshow for time-saving purposes, since the roadshow took place only five months ago,” says Chris Tuffey, head of EEMEA DCM syndicate at Credit Suisse.
“The team were receptive to the lead managers’ advice and were extremely flexible about the timing of the deal, and that got them successful execution.”
Reality Check
By the end of the year, Vysotskyi clearly understood the new pricing realities, and dropped his previous demand of lower successive coupons with the 10-year deal printing at 36.5bp over the 6.385% 2011s that launched in June 2007.“Vysotskyi and the team performed very well in front of the clients and were clued up about fiscal policy, but market volatility in the end had a big impact on pricing,” explains Tuffey.
Indeed, if the finance ministry’s price demands could not be fully met for the bond itself – he certainly cut costs by awarding leads a paltry 5bp in fees, just $350,000 divided between them.
The evolution of Vysotskyi’s own debt strategy last year then provides guidance to other emerging borrowers hovering over the current market abyss. If you are a solid credit and understand that new issue premiums are here to stay, your deal can be speedily executed and with any luck – at a reasonable price. Ukraine’s own funding strategy last year proves this is not mere banker oratory.