Fixed Income Daily Watch Nov 11 2010

MARKET COMMENT
As a result of European debt problems being in focus again market drop down last week. Ukraine20 traded below par.
Friday`s announcement of G20 leaders about support of bonds issued until 2013, has provided bond market with some positive sentiment and yesterday it was a bit stronger with Ukraine20 traded about 100.5. Sellers of Ukrainian Eurobonds are not aggressive: most offers are not flexible. Moreover, we expect to see some growth today due to news on IMF staff-level agreement (see below).

UKRAINIAN NEWS
Ukraine reached staff-level agreement with IMF
IMF announced that staff-level agreement with Ukraine on the first revision of the new stand by program has been reached. The letter of intent will be passed to board of directors of IMF to finish the program revision. The result will be SDR 1 bn (USD 1.6 bn) tranche disbursement, USD 1 bn out of which will be spent for Ukraine’s State budget deficit covering. According to IMF representative Thanos Arvanitis, Ukraine has met all of the quantitative criteria as of the end of September. For 2011 IMF expects further fiscal consolidation in Ukraine and reforms in energy sector, which will allow balancing the budget of Naftogaz. It is expected that core inflation will demonstrate further decline, and public finance deficit will not exceed 3.5% of GDP in 2011.
The news is STRONGLY POSITIVE for Ukrainian еurobonds universe, sovereigns are expected to be the first to gain as they have retreated significantly lately.

Naftogaz turns profitable in 3Q2010
NJSC Naftogaz posted UAH680 mn (USD 86 mn) net profit for 9m2010 comparing to UAH 1.9 bn (USD 238 mn) loss reported in 9m2010. The main contribution into 9m result was made in 3Q: net profit amounted UAH 977.5 mn (USD 123 mn) and covered UAH 297 mn (USD 37.4 mn) loss made during the first two quarters of 2010. Net revenue and gross profit of Naftogaz in 3Q increased by 32.9% y/y and 30.1% y/y, respectively. The major reason for such improvements in financials is increase in tariffs which was made in August.
We also note improvement in liabilities part of the Company’s balance sheet, especially regarding debt’s time structure. The Company’s liabilities decreased by UAH 10.2 bn, or 15.3% due to current liabilities dynamics, while long-term bank loans increased almost by 10x, or by UAH 23.2 bn. At the same time short-term bank loans decreased by UAH 22.2 bn to UAH 4 bn.
The only negative point was 29% increase in accounts receivable, that reflects the low level of payments for the used gas by public utilities. The recent increase of the Company’s statutory fund by UAH 7.4 bn by the government has not been reflected in Nafto’s balance sheet as it took place in the beginning of November.
We believe that profit of Naftogaz will face another hike in 2011 when Ukrainian government will make the next increase in tariffs in April according to its commitment to IMF. We recommend using current market nervousness for considering Naftogaz eurobond purchase at decreased prices.