Ukraine State Bank Bonds Jump as Better Terms Seen in Debt Talks

State Export-Import Bank of Ukraine bonds gained the most on record on speculation creditors will get better terms on the lender’s debt as the nation seeks $15.3 billion from restructuring.

Ukreximbank’s $750 million of notes due April 27 jumped 8.57 cents to 56.6 cents on the dollar after the Finance Ministry said state lenders will be treated differently because of their importance in Ukraine’s economic recovery. The bonds and those of AT Oschadbank will be used toward achieving only one of the three targets in a $40 billion International Monetary Fund-led bailout program, the ministry said on April 4.

The special treatment may limit the size of writedowns, according to Standard Bank Group Ltd. and Jefferies Group LLC, as investors brace for bigger losses on Ukrainian sovereign bonds. The east European nation, whose largest creditors are Franklin Templeton and Russia, is seeking to restructure 29 bonds and enterprise loans by the end of May to secure the IMF aid.

“There is an understanding that target one means just a maturity extension and no haircut,” Tim Ash, the chief emerging-market economist at Standard Bank in London, said by e-mail on Tuesday. “Ukreximbank seems to be important for managing international state financial transactions, and Oschadbank is important for domestic financial transactions.”

Ukreximbank’s notes outperformed the government’s $2.6 billion of debt due in July 2017 on Tuesday, with the sovereign securities falling 0.3 cent to 40.74 cents on the dollar by 4:26 p.m. in Kiev. A price of around 40 cents signals creditors will face writedowns to their principal holdings of about 20 percent, Bank of America Corp. said in March.

Smaller Losses

Oschadbank’s dollar bonds maturing in October 2016 climbed 7.2 cents to 49 cents on the dollar.

In its statement, the Finance Ministry said the lenders’ debt will be part of only the first of the three IMF-mandated targets, which involves cutting $15.3 billion from public-sector financing costs over four years.

The second initiative aims at bringing Ukraine’s public and publicly guaranteed debt-to-gross domestic product ratio to below 71 percent by 2020, while the third seeks to keep the budget’s gross financing needs at an average of 10 percent of GDP in the 2019-to-2025 period.

“It is not very clear to me what the Finance Ministry is saying, beyond that the external debt of these two banks will be rescheduled separately and subject to lower haircuts, possibly,” Richard Segal, the head of emerging-market credit strategy at Jefferies in London, said by e-mail on Tuesday.

Debt Extension

Ukreximbank is asking holders of its notes due this month to vote by April 9 on a proposal to push back the maturity date by three months to July 27. Investors should reject the extension because “there is a significant probability that these bonds will be paid at par,” according to Stan Manoukian, founder of Independent Credit Research LLC.

Should the government default on the notes “there is going to be a massive run on deposits,” he said by phone on Tuesday from Agoura Hills, California. “If the country wants to preserve this bank they will have to rescue it and, at the end of the day, they will end up paying more than just taking care of these bonds.”

Ukrainian bonds have handed investors losses of 44 percent in the past 12 months, the worst performance in emerging markets, as a year of fighting in the nation’s east crippled the economy and drained international reserves to a record-low $5.6 billion in February. A $5 billion aid tranche from the IMF helped bolster that level to $9.97 billion in March.

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