Ukraine Railways Bonds Jump Most on Record on Writedown Bets

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Ukrainian Railways bonds surged the most on record on speculation its creditors will get better terms than holders of the nation’s sovereign debt as the government seeks $15.3 billion from restructuring.

Ukrainian Railways’ $500 million of notes due May 2018 jumped 10.06 cents to 51.81 cents on the dollar by 3:14 p.m. in Kiev after the Finance Ministry said Friday the bonds will only be used to achieve one of the three targets of negotiations. State Export-Import Bank of Ukraine, which is also excluded from the second and third targets, said April 15 its creditors won’t face principal writedowns on their holdings if a three-month maturity extension is voted for this month.

The east European nation, whose largest creditors are Franklin Templeton and Russia, is seeking to restructure 29 bonds and enterprise loans by the end of May to secure the next tranche of a $17.5 billion International Monetary Fund loan. Ukraine rejected the first proposal from a group of creditors that own about $10 billion of the nation’s debt, Finance Minister Natalie Jaresko told reporters in Washington on Friday.

“I have heard that there will be no haircut and only a lengthening of maturities to bridge the liquidity issues,” Lutz Roehmeyer, who oversees about $1.1 billion of emerging-market debt at Landesbank Berlin Investment GmbH, including Ukrainian Railways bonds, said by e-mail Monday. “Investors in the banks and Ukrainian Railways are more relaxed now.”

Separate Process

Bonds of State Export-Import Bank of Ukraine, known as Ukreximbank, and AT Oschadbank rallied after the Finance Ministry said April 4 that they will get special treatment because of their importance to Ukraine’s economy. Oschadbank’s $500 million of notes maturing March 2018 have climbed 18.1 cents to 58.9 cents on the dollar since then. Ukreximbank’s bond due April 27 is trading at 64.79 cents.

Each of the three state-owned companies singled out by the Finance Ministry will “undergo a separate process targeting its specific situation,” according to a presentation given to investors and reporters in Washington on Friday.

Ukrainian Railways will probably not receive the same special treatment as Ukreximbank and Oschadbank because it is not “instrumental” to the economic recovery and it reported a loss in its latest financial results, according to Richard Segal, the head of emerging-market credit strategy at Jefferies Group LLC in London.

‘Greater Haircuts’

“On the basis of credit metrics, the Ukrainian Rail bonds should be subject to far greater haircuts than that of the other public debt,” Segal said in an e-mailed note on Monday. “If the treatment is anywhere close, then this will reflect goodwill on the part of the Ministry of Finance.”

The first of the three IMF-mandated targets involves cutting $15.3 billion from public-sector financing costs over four years.

The second aims at bringing Ukraine’s public and publicly guaranteed debt-to-gross domestic product ratio to below 71 percent by 2020, while the third seeks to keep the budget’s gross financing needs at an average of 10 percent of GDP in the 2019-to-2025 period.

Government debt will rise to 94 percent of GDP this year, IMF estimates show. The economy shrank 6.9 percent last year and will contract 5.2 percent in 2015, according to the median of estimates compiled by Bloomberg.

The Ukrainian Finance Ministry said in a March 13 presentation to investors in Kiev that the bonds and loans of the three companies would be assessed separately from the other assets in the restructuring program because they do not have a sovereign guarantee.

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