Bonds Up Slightly on Low Volumes

TRADE IDEAS
We reconfirm our Buy recommendation on MHP 15s which gained 1pt last week and are now trading with a 184bp spread over the sovereign curve and 72-130bp over selected Ukrainian corporate peer bonds. We remain positive on the issuer given its good 1Q11 results and our expectation of positive full-year performance. MHP plans to generate 2011 EBITDA of $365-370m and invest up to $320-340m this year. The company’s total debt stood at $805m as of end-1Q11, with average interest below 10%. Net Debt/EBITDA reached 2.07x (vs. 2.03x as of end-2010), remaining below the bond covenant of 2.5x.
We continue to recommend buying Mriya 16s. Despite appreciating by half a point to 102 last week, now yielding 10.4%, the bonds still trade 70bp over Avangard 15s and 260bp over MHP 15s — which we believe is 40-60bp higher than their fair level. The issuer is one of the largest agricultural producers in Ukraine with strong financials and low leverage, its end-1Q11 bank debt of $373m (including the $250m Eurobond) and cash balances of $268m suggesting a very low Debt/EBITDA of 0.3x.
We also recommend buying DTEK 15 given the issuer’s healthy financials (see below), ambitious investment strategy and low leverage. DTEK’s end-2010 debt stood at $691m, with $212m of cash, implying a low Net Debt/EBITDA of 0.6x, or well below the Eurobond covenant of 3.0x. DTEK’s $6bn medium-term CAPEX program for 2011-15 earmarks $1.5bn for coal mining, $2.7bn for power generation and $600m for electricity distribution. DTEK 15s are currently priced at 108.0 to yield 7.1% — implying a spread of 20-60bp over Metinvest 15s and Ferrexpo 16s.
NEWS
Eurobond Market
Privatbank to increase share capital
DTEK — Posts strong 1Q11 operating results
S&P upgrades Alfa Bank Ukraine to B-
Naftogaz Ukrainy — Requests budget support

Domestic Bond Market
Gov’t refuses all bids at Treasury auction