Ukraine Egg King Bond Fortunes Tied to Putin: East Europe Credit

Holders of Oleg Bakhmatyuk’s dollar bonds have no shortage of causes for concern as Ukraine’s egg king battles with the fallout from a swooning currency, questions on governance and insurgency in the country’s east.

Instead, the bonds are gaining as investor sentiment perks up with the conflict against Russia abating. The $500 million of notes due March 2018 from Bakhmatyuk’s UkrLandFarming holding company have climbed about 9 percent to 86.25 cents on the dollar since the start of May, according to Bloomberg generic prices. Debt maturing in October 2015 issued by Avangardco Investments Plc, the group’s London-traded egg-production unit, is at 95.63 cents, from 90.5 cents on May 9, according to prices on Trace.

Appetite for Ukraine’s government and corporate debt is responding to signs of progress in easing the turmoil and after a $17 billion bailout approved by the International Monetary Fund on May 1 staved off financial collapse. Russian President Vladimir Putin held his first talks with Ukraine’s new leader, Petro Poroshenko, on June 6 and met with President Barack Obama in meetings brokered by France, which sought to use the backdrop of D-Day commemorations to ease tensions.

“The performance of financial assets in that part of the world is almost entirely headline driven,” said Richard Segal, international credit strategist at Jefferies International Ltd. in London. “The perception is that political risk in the area is declining, so that is positive for the sovereign and therefore positive for corporates.”

Coal Miner

It isn’t just Bakhmatyuk’s bonds that are rallying. The price of coal miner DTEK Holdings BV’s $200 million of notes due April 2015 has climbed to 95 cents on the dollar from 90 cents on May 1, Bloomberg generic prices show. The $750 million of debt maturing in April 2020 from the poultry producer MHP SA is at 90.67 cents on the dollar, up from 82.14 cents on May 1.

“The high quality corporates should be OK,” Rohit Gadkar, who helps manage about $1.4 billion of assets as an emerging-markets portfolio manager at TREA Capital Partners in Barcelona, said by e-mail June 6. “I have always viewed the greatest risk to these as sovereign risk.”

ULF, as Bakhmatyuk’s Cyprus-registered holding company is known, is the largest agricultural producer in Ukraine, with crop growing and eggs contributing more than 80 percent of profit, according to Fitch Ratings. It has one shareholder other than Bakhmatyuk: Minneapolis-based agricultural products trader Cargill Inc., which took a 5 percent stake in January for an unreported sum.

China Push

Ukraine, known as Europe’s bread basket, is the world’s second-biggest crop exporter, according to the U.S. Department of Agriculture.

ULF has been seeking to expand abroad. In April the company signed an agreement with China CAMC Engineering Co., a state-owned infrastructure group, which will build a grain port, warehouses and meat-production centers in the eastern European country, financed by $4.1 billion in Chinese loans, according to an exchange filing by the Chinese company.

Ukraine’s currency, the hryvnia, has lost about 30 percent this year. The depreciation may benefit ULF because the crops the company sells are priced in dollars and its biggest costs including wages and fuel are in hryvnia, according to Pablo Mazzini, an analyst at Fitch in London.

Fitch ranks ULF at CCC, the fifth lowest of 22 ratings.

“This is the time to sell Ukraine, all the good news has run out,” said Olga Budovnits, an emerging-market credit analyst at Union Bancaire Privee in Zurich. “We have a country that has IMF program which is too optimistic in its assumptions and thus is not enough to help the country get out of trouble.”

Cash Strapped

For ULF, the risk is that Ukraine’s cash-strapped government may impose higher duties on sales of agricultural products or compel producers to sell at below-market prices, Standard & Poor’s wrote in a report on March 7 when it cut the company’s CCC+ foreign-currency rating to CCC.

Ivan Dzvinka, an analyst at Eavex Capital, and Alexander Paraschiy at Concorde Capital, both in Kiev, complain that the company’s accounts aren’t easily available on its website.

“Governance is an issue, they aren’t very transparent,” said Paraschiy. “Nobody understands the business -- five years ago there was no company called UkrLandFarming. Now it’s the biggest land operator in Ukraine.”

Company officials returned this month from a two-week trip meeting investors, Deputy Chief Executive Officer Ihor Petrashko said in a June 4 phone interview from Kiev. The accounts are available to anyone who asks, he said.

“The owner’s reputation isn’t great but we could look at the reputations of owners of companies in India, in Brazil and so on,” said Segal at Jefferies. “Bakhmatyuk has a better debt service track record in bonds of companies he owns than do many other oligarchs.”

Before it's here, it's on the Bloomberg Terminal.