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Concorde Capital Research: Ukraine MinFin agrees to new restructuring terms of debt to central bank

October 05, 2017 - Cbonds

 

The Ukrainian government approved new restrucuturing terms of its local bonds that are held by the central bank, the Finance Ministry reported on Sept. 4. Based on the new deal, the central bank will agree to restructure local currency sovereign bonds of a total par value of UAH 219.6 bln (about USD 8.3 bln), of which UAH 159.5 bln mature in 2017-2020.

After the restructuring, the bonds will mature every six months between May 2025 and November 2047. For the bonds that mature in 2025-2035 (about UAH 74.4 bln outstanding), a coupon will paid on semi-annual basis and will be in the range of 11.30% (for the shortest one) to 8.12% (for the longest one). For the bonds maturing in 2036-2047 (UAH 145.2 bln outstanding), coupons will be paid annually at a fluctuating rate equal to 12M trailing CPI plus 2.2pp. The first coupons on all the bonds will be paid next year.

Recall, in May 2017, MinFin and central bank were close to agreeing to the restructuring of UAH 229 bln in bonds with their maturity shifting to 2025-2047 (similar to the new deal), but with a coupon equal to annual CPI + 1.5pp for all the bonds. However, the parties were not able to finish the restructuring on those terms, and the Cabinet ruled to cancel the deal on Aug. 9.

Alexander Paraschiy: As we commented before, the government might have been afraid of a high inflation rate in the coming periods (which would inflate coupon payments next year), which seems to be the key reason for the failure of the previous deal. This time, the government secured fixed coupons for some of the new bonds, but it had to sacrifice a higher coupon rate (CPI + 2.2pp instead of CPI + 1.5pp) for the rest.

Overall, the debt operation will only allow MinFin to save some of the budget costs this year (about UAH 7 bln in a coupon payment that will be shifted to next year), which, however, will result in a respective drop in income of the central bank in 2017, and may result in a respective decrease of distribution of central bank’s income to the budget next year. Therefore, the positive fiscal effect will be only seen in 2017.

The deal will reduce MinFin’s bond repayment needs by UAH 11 bln in 2017, UAH 46 bln in 2018 and UAH 67 bln in 2019, which looks positive. On the other hand, MinFin never had trouble in refinancing its local bonds on the domestic market.

All in all, we do not see clear benefits from the debt operation for the budget beyond the year 2017. Moreover, the precedent of restructuring local bonds (which Ukraine hasn't done in recent years) is not a good signal for the local bond market, in our view.
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Cbonds page: Ukraine
Issuer profile:

Ukraine is a country in Eastern Europe. It has an area of 603,628 sq km, making it the largest country entirely within Europe. The country is home to 45.4 million people.

Outstanding issues:
30 issuesUSD26,047,041,000
1 issuesEUR141,320,000
314 issuesUAH820,720,070,000
Issuer rating:
RIA RatingD/Sovereign ratings10/09/2015
Dagong CreditCC/NegativeInternational scale rating (foreign curr.)07/17/2015
Dagong CreditCC/NegativeInternational scale rating (local curr.)07/17/2015
Organisation for Economic Co-operation and Development (OECD)7/Country Risk Classifications06/24/2016
Moody's Investors ServiceCaa2/PositiveLT- foreign currency08/25/2017
Moody's Investors ServiceCaa2/PositiveLT- local currency08/25/2017
S&P Global RatingsB-/StableForeign Currency LT10/19/2015
S&P Global RatingsB-/StableLocal Currency LT10/19/2015
S&P Global RatingsuaBBB-/LT National Scale (Ukraine)10/19/2015
Fitch RatingsB-/StableLT Int. Scale (foreign curr.)04/28/2017
Fitch RatingsB-/StableLT Int. Scale (local curr.)04/28/2017
Fitch RatingsWithdrawn/National Scale (Ukraine)09/02/2011
Rating Agency RAEX (Expert RA)Withdrawn/Foreign curr. scale07/04/2016
Rating Agency RAEX (Expert RA)Withdrawn/Local curr. scale07/04/2016
National Rating AgencyiSD/NegativeGlobal scale09/30/2016
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