Markets

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

Ukraine is coming back to the international capital markets for the first time since the $15 billion restructuring in 2015. A potential flood of investors into this one makes a lot more sense than the flurry of demand we've seen in some recent deals.

A 10- to 15-year bond for as much as $2 billion could price this week. The timing couldn’t be better for the country, as yields on existing 10 year debt have plummeted from 9.3 percent in March to 7 percent now. Interest already seems substantial.

Red Hot
Ukraine's 10-year yield has steadily dropped as confidence returns with the IMF restructuring
Source: Bloomberg

It's not just that emerging markets are red hot. Yields are the lowest for four years and there is particular interest in Central European debt, of which there's been relatively little supply. Recent deals from Iraq and Tajikistan, and Belarus earlier in the summer, proved the strength of demand. 

Ukraine Comparables
With Caa2/B- credit ratings, the new deal should price around 7.25-7.5% for 10-15 years
Source: Bloomberg

The key is the presence of the International Monetary Fund. This deal is the next step in its plan to help Ukraine recover from a recession bought on by revolution and conflict. The arrangement calls for $1 billion in new money to be raised from outside investors this year, rising to $2 billion next year and $3 billion in 2019. A successful transaction this month will instill investor confidence that Ukraine is fulfilling its side of the bargain.

The plan seems to be taking hold -- about half the money raised in the new bond deal will be new money. Ukraine is tendering to buy back probably up to $1 billion of its existing 2019 and 2020 debt, which is trading a little above 5 percent. It looks like holders of these notes are keen to keep them so they can participate in the tender on Friday, and be assured of an allocation in the (higher yielding) new deal. It's all to the better, as success will ease Ukraine's struggle to make repayments due before the end of the decade.

So investors are looking at a big, liquid deal with a bit of a premium to existing debt. It looks a much more logical bet than first-time issuer Tajikistan, which does not benefit from having an IMF safety net.

Few emerging market stories come without considerable risks, which help explain the relatively high coupons to compensate. For Ukraine, the ongoing conflict in the east, and Russia's annexation of Crimea, have hit the economy hard. Buying the debt of countries in which Russia still sees a vested interest, and have a problem with corruption, requires nerves of steel.

As the IMF has Ukraine’s back, with $8.4 billion already committed, investors can take a more considered view. The fund has said it will release a further tranche of $1.9 billion after pension reforms are put into law, and the government sees that happening in the coming weeks, according to Reuters.

Ukraine's Debt Maturity Profile
Buying back shorter-term securities and issuing longer bonds eases the repayment burden
Source: Bloomberg

With the tender and the new issue, the country's lengthening its debt profile and bought some time to gin up its recovery. Ukrainians are at an important juncture and have a chance to get up off their knees. Investors seem willing to help them up.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Marcus Ashworth in London at mashworth4@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net