Bond Market Insight-Weekly review: Local bonds feel the heat of global risk-aversion; MHP, FXPO, VAB, and DTEK comments

This week, in our view, promises everything but the rise of prices in Ukraine\'s fixed income at home and abroad. Domestically, authorities were talking about some additional flexibility they might allow in the FX market. While the US-EU pair will not heal the global market this week (trading is going to be volatile, too, as the markets\' idea of the common EU Eurobond was firmly rejected by Chancellor Merkel) non-resident investors may join the exodus from the local government bond market. This is a clear condition for prices on local bonds to do everything but rise. On the Eurobond market, there is little possibility that some good news may arise (IMF or otherwise) that would sweeten the market\'s view on Ukraine\'s sovereign risk (above 500bp on the CDS market).

Local currency. In response to the global financial fallout, Ukraine\'s authorities (namely, the NBU) said they would allow a bit more flexibility in the FX market that will allow the UAH to move inside the 5% band (2.5% on each side of the current level of 8/USD). For the local FX market, this means that the UAH may weaken to 8.2/USD in the 2H11. Politics and the Naftogaz deficit\'s risk of widening due to weaker currency would force the NBU to more effectively manage the exchange rate. Thankfully, the size of FX reserves provides room for such management.

Domestic bond market. Despite liquidity increasing at the beginning of last week, the primary auction collected the smallest demand, as in a week ago, of only UAH20.0m. Non-residents withdrew their funds invested in local-currency bonds and stimulated rates\' increasing on the secondary market. In any event, the MoF is not going to increase rates, and will not borrow any funds in the next few weeks.

Eurobond market. Ukrainian Eurobonds\' YTMs remain high, and slightly corrected last week. The unstable situation on the global markets has a direct impact on Ukrainian Eurobonds. The Ukrainian 5-year CDS remains above 500bp, but Eurobonds\' spreads tightened compared with a week ago.

In this report, we provide the following comments on four names: MHP, Ferrexpo, DTEK, and VAB Bank:

MHP (B2/B): 1H11 results bring a 19% YoY rise in EBITDA (page 5)

Ferrexpo (B2/B): Company\'s key customer confident about demand prospects (page 5)

DTEK (B2/B): 1H11 operating results published (page 6)

VAB Bank (CCC): Recently arrived key shareholders consider resale of their stakes in the bank to new buyer (page 7).