Ukraine Bond Rally Gets Fillip as Payment Signals Talks Progress
Ukrainian bonds rose, extending this month’s biggest rally in emerging markets, as the government made an interest payment on time, showing negotiations toward a $19 billion debt restructuring are progressing.
The nation’s debt due July 2017 climbed to a five-month high as the Finance Ministry honored a $120 million installment on that note due Friday. Its Eurobonds, which have handed investors returns of 10 percent in July, capped the fifth week of gains after a person familiar said the International Monetary Fund will approve the next part of a rescue loan, while Goldman Sachs Group Inc. advised investors to favor shorter-dated bonds.
“The market is relieved that a moratorium has not been implemented,” Fyodor Bagnenko, a Kiev-based bond trader at Dragon Capital, said by e-mail on Friday. “Most likely this is a sign of some progress in negotiations, which is supportive for the market.”
While details of the talks haven’t been revealed, the payment suggests Ukraine is making headway toward convincing a creditor committee led by Franklin Templeton to accept losses on their principal holdings, a concession it so far rejected in all public statements. The country is seeking debt relief after a 16-month conflict with pro-Russian rebels in its easternmost regions plunged the economy into a recession and drained foreign-currency reserves.
As Finance Ministry spokeswoman Daria Marchak confirmed the interest payment was made, the sovereign’s $2.6 billion of 2017 securities climbed 0.3 cent to 55.62 cents on the dollar by 5:18 p.m. in Kiev, bringing this week’s advance to 1.9 cents.
Shorter Maturities
The disbursement also boosted Ukraine’s first notes coming due since the debt talks started, a $500 million security maturing Sept. 23, by 0.8 cent to 55.26 cents on the dollar, a six-week high.
Restructuring “scenarios favor the front end of the curve over any longer-dated bonds,” Goldman analysts Clemens Grafe and Andrew Matheny wrote in an e-mailed report dated July 23. “Longer-dated bondholders will need to give a substantially more attractive deal to holders of the September and October bonds” to convince them to agree to a deal, they said.
In addition to Franklin Templeton, the creditor group owning $8.9 billion of the nation’s debt includes TCW Investment Management Co., T. Rowe Price Associates Inc. and BTG Pactual Europe LLP
Before the committee and the government entered confidential negotiations this month, Ukraine was asking for a 40 percent so-called haircut, while the group insisted such losses weren’t needed to comply with terms of the IMF loan. The Washington-based fund has stipulated the country should, among other targets, cut debt to 71 percent of economic output by 2020 to qualify for the $17.5 billion package.
IMF Loan
The IMF will probably approve the next $1.7 billion payment on the loan at an executive board meeting next week, according to the person familiar with IMF discussions, who asked not to be identified because the talks aren’t public.
Fund officials have been sufficiently encouraged by the pace of talks to recommend releasing the installment, the person said. They regard Ukraine and its creditors as being on track to satisfy conditions of the bailout, hopefully before the second review of the program is completed, according to the person.
Bondholder Giuliano Palumbo, a Milan-based money manager who helps oversee $3 billion in emerging-market debt for Arca SGR, said it was possible for the restructuring agreement to be reached before the September bond matures. He acknowledged receiving payment of the 2017 bond coupon.
The next test of Ukraine’s willingness to meet its obligations comes on Aug. 23, when $60 million of interest is due on a $1.5 billion debt maturing in 2021. The sovereign has a 27.9 percent probability of defaulting in the coming year, the highest in the world, according to Bloomberg’s default risk model.
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