Ukraine Bonds at 60 Cents Seen Signaling Risk of Default

Ukraine’s deepening recession and mounting debt burden have bondholders to Moody’s Investors Service weighing prospects for a sovereign default.

The country’s July 2017 notes are trading below 60 cents on the dollar, extending a record monthly selloff in December, down from above par a year ago. Ukrainian debt lost 21 percent in 2014, the worst slump after Venezuela among 59 countries tracked by the Bloomberg USD Emerging Market Sovereign Bond Index.

Investors are fleeing as central bank Governor Valeriya Gontareva said on Dec. 30 that Ukraine is facing a “full-blown financial crisis” and that its economy probably shrank 7.5 percent in 2014 amid a collapse in the currency and the war with pro-Russian separatists in the country’s east. Bond prices are signaling expectations of delayed repayments and possible losses on principal, according to Lutz Roehmeyer at LBB Invest.

“I hope for a rescheduling but I fear it may be a complete restructuring,” Roehmeyer, who oversees $1.1 billion of debt from emerging markets including Ukraine, said by phone from Berlin on Jan. 2. “If you expect Ukraine to lengthen the maturities by three to five years only, without a haircut, the bonds should trade above 80 cents.”

IMF Review

International Monetary Fund representatives are scheduled to arrive in Kiev this week to review Ukraine’s steps to cut the budget deficit before releasing further funds from a $17 billion loan package, Prime Minister Arseniy Yatsenyuk said on Dec. 30. Two tranches of the aid, due last year, have been delayed as the country took a month to form a coalition government after Oct. 26 elections, and another month to pass its 2015 budget.

“Ukraine needs a completely re-designed IMF program” and “consideration of private-sector involvement in a new program is expected,” Nicolaie Alexandru-Chidesciuc, a JPMorgan Chase & Co. economist in London, wrote in a report to clients dated yesterday. “Principal haircuts may be needed eventually.”

Debt restructuring “isn’t currently a subject of talks,” Deputy Finance Minister Ihor Umanskyi told reporters in Kiev on Dec. 25. The ministry had no further comment on the issue until the IMF’s visit to Ukraine finishes at the end of January, spokeswoman Tetyana Babych said yesterday by phone.

The economy will shrink another 6 percent this year and the country will need an extra $15 billion to $20 billion of funding on top of the existing bailout programs to stay afloat, Moody’s said in a report on Dec. 22. It rates Ukrainian bonds at Caa3, nine levels below investment grade, with a negative outlook.

‘Exceedingly High’

“The government faces roughly $10 billion in foreign-currency debt service” in 2015 and “it is not clear whether new credit from the IMF, the European Union and other official lenders will be sufficient to cover these maturities,” Moody’s analysts Kristin Lindow in New York and Alpona Banerji in London wrote in the note. “The risk of default is exceedingly high.”

It costs $4.55 million in advance and $500,000 annually to insure $10 million of Ukraine’s debt for five years with credit-default swaps, implying a 75 percent probability of a default in the period, according to CMA data. The swaps cost the most after Venezuela among 46 nations worldwide tracked by Bloomberg.

Diplomats from Moscow and Kiev met in Berlin yesterday to try to end a conflict in Ukraine’s industrial heartland that has killed 4,700 people and displaced more than 1 million, according to the United Nations. The Ukrainian military said the same day that rebels attacked government troops with tanks and artillery as Russia keeps supplying them with men and weapons.

Donor Conference

The country’s debt burden ballooned last year as GDP shrank and the hryvnia depreciated 48 percent against the dollar, the most among all currencies tracked by Bloomberg worldwide. The central bank’s ability to prop up the hryvnia and help the government and companies meet external liabilities is limited after its foreign reserves fell to $10 billion in November, the least since Bloomberg began tracking the data in January 2005.

Ukraine has $14 billion of principal and interest payments coming due this year on foreign and domestic debt and $10.2 billion of liabilities in 2016, according to data compiled by Bloomberg. The $2.6 billion of July 2017 bonds fell to record 57.5 cents today by 4:34 p.m. in Kiev, compared with 69 cents for the $500 million of notes maturing in September this year.

Ukraine seeks to hold a donor conference to help it raise extra funds needed to avert default, Yatsenyuk said on Dec. 11.

“I expect some debt exercise sooner rather than later because nobody is really willing to finance the country and we have big maturities in 2015 and 2016,” LBB’s Roehmeyer said.

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