LBB Invest Is Happy Crimea Bondholder, Fund Manager Says

Russia’s military intervention in Ukraine’s Crimean peninsula is bolstering the regional government’s ability to repay its lone bond, a $14 million note maturing in three months, according to a German creditor.

Whichever side -- Ukraine or Russia -- ends up with control over Crimea, it will feel compelled to ensure the region makes good on its debts, Lutz Roehmeyer, a money manager at LBB Invest, owned by Germany’s DekaBank Deutsche Girozentrale, said by phone from Berlin yesterday. LBB holds 3.8 percent of the Autonomous Region of Crimea’s 133 million hryvnia, 14.5 percent notes, according to data compiled by Bloomberg.

The Black Sea peninsula, a part of Ukraine since 1954, will vote in four days about whether to join Russia after President Vladimir Putin’s forces took control of the region, triggering the worst conflict with the West since the Cold War.

“If it becomes part of Russia, I wouldn’t expect that the first thing they do is let it go insolvent,” said Roehmeyer, who is managing 700 million euros ($971 million) for LBB Invest’s Weltzins-Invest and Multizins-Invest funds. “Russia already said they would support Crimea and, frankly, I’ll take their word for it.”

The European Union and the U.S. are trying to use sanctions to force Putin to retreat in Crimea as Ukraine’s government and the Group of Seven leaders said the sovereignty referendum violates the country’s constitution.

‘Better Off’

If the diplomatic wrangling results in Crimea staying with Ukraine, a similar argument applies, Roehmeyer said.

“It would equally cast a damning light on Ukraine if Crimea was to stay with Ukraine and the next thing that happens is it can’t pay its debts,” he said by phone today. “People will say, ‘Why did we do it?’ Therefore, the bond is better off than that of any other Ukraine region, because there are two potential funding sources.”

The main risk for the bond, which is bid for at 93 cents on the dollar, resulting in a 50 percent bid yield, according to prices from Dragon Capital compiled by Bloomberg, is that the Ukrainian currency will probably devalue, Roehmeyer said.

Russia’s Finance Ministry press office didn’t answer phone calls seeking comment after regular working hours today.

Meeting Obligations

The hryvnia has tumbled 12 percent this year against the dollar as the central bank scaled back its defenses of the currency. That is the third-worst performance worldwide after the Argentine peso and the Kazakh tenge. The Ukrainian sovereign’s $1 billion bond due in June fell to 91.003 cents on the dollar at 8:08 p.m. in Kiev, the lowest on record on a closing basis, increasing the yield to 54 percent.

The other risk, in case the region stays with Ukraine, is that the nation may ask for a debt maturity extension, Roehmeyer said. The government will be able to meet its obligations, although it would consider restructuring if investors “want and officially request such a change,” the Finance Ministry said in a statement March 5.

LBB Invest, formally known as Landesbank Berlin Investment GmbH, used to be the fund manager of Berlin-based Landesbank Berlin AG, which sold it to DekaBank last year.

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