Ukraine’s $2bn five year bond last week was an achievement that few had expected. It had been 10 months in the making and was the first bond from the country since June last year.
Only a few weeks ago, analysts had said that Ukraine was locked out of the capital markets until such a time as it could raise gas prices to appease the IMF, which would trigger a resumption of the multilateral's bailout programme.
There is now some hope – both from lead managers on the deal and local research houses — that the deal could mark the start of a slide in yields.
They take their optimism from the experience of Hungary, which showed in the first half of last year that once market appetite has been sparked by a deal, it can lead to other investors piling into the paper for fear of missing the boat.
Ukraine's deal priced at a yield of 9.25%, leaving a lot of scope for a rally. Its five year deal last June priced at 6.25%.
But the fanfare surrounding this latest deal has come too early. When Hungary sold its first note last year, investors believed the country’s major problems to be more or less over. Subsequent transactions that raised billions of dollars over the next few months saw the funding cost for the country come tumbling down as investor confidence became self-fulfilling.
It was only when Victor Orbán, Hungary’s prime minister, began passing laws that the EU regarded as questionable (on press freedom and the independence of the judiciary and central bank) that the bond market began battening down the hatches again.
Few believe, however, that Ukraine’s problems are anything like over right now. The IMF is calling for Ukraine to hike domestic consumer gas prices by 30%-50%. It won't hand over more funds from its suspended bailout until the country complies.
With a parliamentary election coming up in October, the Ukraine government is unwilling to take this kind of politically risky move. It hopes it can negotiate cheaper natural gas prices from Russia instead. So far a deal along those lines has been unforthcoming, and in any case there is no certainty that the government would consider a price rise even after elections.
Ukraine can show off its shiny new $2bn bond as evidence of there being some appetite for its debt. But the continuing uncertainty means that the borrower has probably tapped most of the likely demand. The bond has already sold off by more than two points since pricing, a worse performance than the broader market.
There will hopefully be a point in the next few months or years when Ukraine will print a bond that will be able to serve as an advertisement for the country’s improved strength, one that drives yields for the country down and which is well supported in the secondary market. Ukraine is not at that point yet.