Core Creditor Dumps Ukraine Holding as Crisis Hobbles Government

  • TCW cut Ukraine exposure to 0.5% of fund in Feb. from 2.4%
  • Franklin Templeton hadn't reduced Ukraine holdings as of Feb.

Political infighting in Ukraine may have cost the country one of its biggest foreign creditors.

TCW Investment Management Co. cut its exposure to the country’s bonds by more than three quarters in February, according to data compiled by Bloomberg. Domestic turmoil worsened that month as the resignation of a reformist economy minister sparked a crisis that drove the government to the brink of collapse and remains unresolved.

The Los Angeles-based money manager was one of four firms that steered the negotiations in 2015 that led to a $15 billion restructuring seen by some as unduly soft on bondholders. TCW’s retreat is a sign that investors are losing faith in the Kiev government’s ability to avoid returning to the bargaining table for better terms, according to Capital Economics Ltd.

“There is a lot of frustration with the politics," said Gintaras Shlizhyus, a Vienna-based strategist at Raiffeisen Bank International AG, which has a hold recommendation on Ukrainian bonds. “I’m not surprised that some investors want to leave this market.”

The restructuring was a condition of an International Monetary Fund bailout that’s now in jeopardy as Ukraine’s political paralysis hampers progress on policies required by the fund to make the economy more efficient and transparent.

Slashing Exposure

TCW held just 0.5 percent of its $2.7 billion Emerging Markets Income Fund in Ukraine at the end of February, compared with 2.4 percent on Jan. 31, according to the data. The fund made no changes to the holding in March, the figures show. TCW spokesman Douglas Morris declined to comment on why the fund has reduced its position in Ukraine.

QuickTake Ukraine’s Other War

Most of the fund’s Ukraine exposure was in the shortest-maturity bond, due in September 2019. The yield on that note soared above 12 percent on Feb. 9, six days after Economy Minister Aivaras Abromavicius resigned, complaining that allies of the president were blocking policy changes. Prime Minister Arseniy Yatsenyuk lost his majority in parliament shortly afterward, when two parties left the ruling coalition and the government has been in limbo ever since.

Ukrainian President Petro Poroshenko was forced to make a statement on Twitter on Monday distancing himself from links to assets mentioned in an offshore financial scandal involving a Panama law firm.

Keeping Faith

Not all investors are losing hope in Ukraine’s ability to pull through the political crisis. Yields on the 2019 notes dropped to below 10 percent last month amid speculation that a technocratic government could be formed to push through policy changes to unlock the next tranche of a $17.5 billion IMF loan, disbursements of which have been delayed since October. The bond slid on Tuesday, with the yield climbing 15 basis points to 9.85 percent by 4:52 p.m. in Kiev, the most in almost a month.

Money managers at Aberdeen Asset Management Plc and Jyske Bank AS say they are holding on to their investments in the Ukrainian bonds because the country’s dependence on foreign funding means it will be forced to implement reforms.

“The IMF and Western support is the only way for Ukraine to survive financially,” said Viktor Szabo, who helps oversee $11 billion of emerging-market debt at Aberdeen in London and has a slight overweight position on Ukrainian debt. “If they want to remain current and avoid another default, they have to stick with the program and to stick with the program, they have to have a working government.”

Franklin Templeton

Franklin Templeton, Ukraine’s biggest creditor after investing about $7 billion, didn’t decrease its exposure to Ukrainian bonds in the fourth quarter 2015, the most recent date for which data is disclosed. The San Mateo, California-based investment manager hadn’t made any changes as of early February, a person with knowledge of fund’s holdings said at the time. Franklin Templeton spokeswoman Dorine Johnson declined to comment on Monday.

Poroshenko’s party is trying to lure independent lawmakers so it can form a new ruling coalition to back Parliamentary Speaker Volodymyr Hroisman, its nominee for prime minister. The president urged legislators in a televised interview on Sunday to form a government at its next meeting in mid-April.

Further delays to end the political turmoil will damage confidence and undermine a nascent recovery from a 1-1/2 year recession, the World Bank warned on Friday. Analysts have cut their economic-growth forecasts, betting that the economy will probably grow 1 percent this year, down from a forecast for 1.4 percent expansion made three months ago, according to a Bloomberg survey of 15 economists.

“When a country’s external position is so fragile, it’s clearly a very niche market that’s only of interest to a relatively small group of funds,” said William Jackson, an analyst at London-based Capital Economics, adding that political uncertainty undermined Ukraine’s debt sustainability. “If some people leave it’s not clear that there will be others clamoring to get in.”

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