Ukraine Bond Rout Woos Landesbank Berlin to Otkritie

Ukrainian corporate bonds yielding at least double emerging-market peers are luring investors from Landesbank Berlin Investment GmbH to Otkritie Asset Management on bets the selloff triggered by street protests will fade.

Yields on state-owned NAK Naftogaz Ukrainy’s notes due in September have dropped 0.95 percentage point in the past two days to 19.63 percent. They had surged 2.62 percentage points in the two weeks since Ukraine’s worst protests in a decade broke out and sparked the biggest bond slump in emerging markets. Yields on poultry producer MHP SA’s bonds due in 2020 are down 44 basis points since reaching a record 13.15 percent on Dec. 4.

Landesbank Berlin bought Naftogaz bonds while Moscow-based Otkritie recommended the notes and Pioneer Investments said it’s looking for buying opportunities. The investments are a bet that President Viktor Yanukovych will cobble together enough foreign aid to stem a 51 percent plunge in foreign reserves in the past 2-1/2 years and meet debt payments after his decision to suspend trade talks with the European Union sparked the demonstrations.

“I bought countercyclical Ukraine debt because I think with little concessions and ongoing pressure from the opposition, the government can tap pots of money to roll over debt in 2014,” Lutz Roehmeyer, a fund manager at Landesbank Berlin Investment, who helps oversee about $10 billion of assets, said by e-mail yesterday. “Ukrainian corporates pay higher yields than the sovereign. So if you go into this big risk you should buy the bonds with the biggest risk premium.”

Worst Bonds

Ukrainian corporate bonds have lost 2.5 percent since demonstrations escalated against Yanukovych’s move on Nov. 21 to choose closer relations with Russia over a pact to cement ties with the European Union, according to a Bloomberg portfolio analysis of bond returns. That’s the most among developing nations monitored by the Bloomberg U.S. Dollar Emerging Market Corporate Bond Index, which yielded 5.36 percent yesterday.

Roehmeyer has also been purchasing bonds issued by Ukraine’s State Export-Import Bank, City of Kiev as well as Naftogaz since last month. Otkritie recommends buying short-term Ukrainian debt, Dmitry Kosmodemiyanskiy, who helps manage $1.2 billion at the institution, said at a conference in St. Petersburg yesterday. He didn’t specify how Otkritie is investing the money it oversees.

Protests escalated after the government, which faces almost $17 billion of debt payments in the next two years, according to data compiled by Bloomberg, said it would seek to repair trade and economic ties with Russia rather than pursue a closer relationship with the EU.

Risks ‘Underestimated’

Ukraine, an essential energy transit route between Russia and the EU, is seeking financial aid as its economy struggles to exit a third recession since 2008 and its foreign reserves languish at a seven-year low. Yanukovych, in Beijing to drum up business, said yesterday on his website that Ukraine will get $8 billion in Chinese investment to start projects in industries such as agriculture, shipbuilding and energy.

Bond prices may fall “markedly lower” and the hryvnia “is likely to depreciate precipitously without external support,” Timothy Ash, London-based head of emerging-markets strategy for Standard Bank Group Ltd., said in an e-mailed note today. The currency, which is controlled by the central bank, has been little changed at 8.215 against the dollar since protests began.

“We review the probability of default in Ukraine, and conclude that the risks are being underestimated,” Ash said. “With the market likely trading Ukrainian sovereign/corporate debt prices at distressed levels, we think it will be too tempting for the authorities not to undertake an ‘opportunistic’ debt restructuring.”

‘Significant Premium’

Concern the government will move to limit foreign capital flows helped trigger the debt selloff, Okan Akin, an analyst at AllianceBernstein Ltd. in London, said by e-mail yesterday. “There is a risk that some capital controls will be put in place, making it even harder for Ukrainian companies to service foreign debt,” Akin said. “These concerns mean some investors might demand a significant premium to hold the bonds compared to their similarly rated peers in other markets.”

AT Finansy I Kredyt, controlled by billionaire Kostyantin Zhevago, offered bondholders on Nov. 27 to exchange $95 million of the bank’s debt due in January 2014 for new notes maturing five years later.

“Some bondholders might be wondering if other debtors will be willing to meet their obligations,” Akin said.

Investment Case

The 2016 dollar bonds of Ferrexpo Plc, an iron-ore miner operating in Ukraine, yielded 12.07 percent today, down 30 basis points in the past two days, trimming this week’s jump to 1.11 percentage points. Yields on the 2018 notes of Mriya Agro Holding Plc, an agricultural company based in Ternopil, Ukraine, dropped 28 basis points today to 15.52 percent, after declining 42 basis points yesterday.

“So far, we have not seen degradation of corporate fundamentals, making the investment case for these assets relatively stronger than that for the sovereign,” said Alejandro Arevalo, who helps oversee 4.5 billion euros of debt as emerging markets portfolio manager for Pioneer. “We continue to watch the market closely for opportunities, which can occur when the market overreacts to events.”

(Corrects company unit in first paragraph of story published Dec. 6.)
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