Ukrainian Bonds: Sovereigns Flat, Selected Corporates Outperform

UKRAINIAN EUROBONDS
Ukrainian sovereign Eurobonds finished the week flat with benchmark Ukraine 20s and 21s closing at 103.0/103.5 (7.29%/7.22%) and 103.25/103.75 (7.46%/7.39%). Quasi-sovereign Naftogaz moved down to 106.5/107.25 (7.10%/6.83%), which was more so a result of general market mood than talks about any upcoming restructuring of the company. In the corporate sector, agricultural names remained in focus. Avangard’s strong 1H11 financial results helped its bonds recover some of their recent losses and close as high as 88.5/90.0 (13.72%/13.20%). Another agricultural issuer, Agroton, reported mixed 1H11 results, its bonds continuing to trade mostly on an orders basis. At the same time, we saw two-way flows in MHP 15s, with bonds still trading above 101.0. Among other strong performers, Ferrexpo climbed to 93.0/94.0 (9.81%/9.52%) on buying pressure, shrugging off negative news flow surrounding the affiliated Finance & Credit group.
In other developments, we expect Mriya Agro Holding to publish its 1H11 financials in the coming days. We think the company benefited from sales of end-2010 inventories (250 kt of grain) as local export quotas on grain were lifted by early June.

UKRAINIAN DOMESTIC BONDS
The local bond market remained quiet last week. The government’s redemption of the 3rd and 4th VAT bond tranches exerted some pressure on hryvnia money market rates. At the same time, we saw a pick-up in government bond prices. Activity in corporate bonds was low.

TRADE IDEAS
• While recognizing the Ukrainian bond market’s continued low liquidity and investors’ cautious approach, we recommend buying Ferrexpo 16s, trading at a 10.4% YTM and a 346bp spread over the sovereign curve. Current price levels imply quite high spreads of 97-117bp over peer DTEK 15s and Metinvest 15s. We believe the current rumors of shareholder change at Ferrexpo are far-fetched. Even if this unlikely scenario occurs, we believe the issuer will fulfill its obligations to creditors given its low leverage and high liquidity.
• We recommend buying Avangard 15s on the back of the issuer’s strong 1H11 results and ambitious plans for 2012-13. The bonds are trading at a 14.3% YTM and a 650bp spread over the sovereign curve.
• We also recommend buying MHP 15s, trading at a 9.9% YTM and a spread of 291bp over the sovereign curve. MHP 15s are underperforming peer DTEK 15s, whose current spread over the sovereign is 50bp lower.
• We have a buy recommendation on Mriya 16s (11.4% YTM, 461bp over the sovereign), expecting the issuer’s 1H11 results to support a positive outlook.

WEEKLY NEWS DIGEST

Eurobond Market
IMF explains reasons for postponing Ukraine mission visit
Avangard — Reports strong 1H11 results
Ferrexpo — Secures $420m credit facility at Libor+225bp
DTEK — Attracts $150m three-year loan
Agroton — Reports 1H11 results
Interpipe — Renegotiates Debt/EBITDA covenant on Eurobonds
PM Azarov: Naftogaz Ukrainy restructuring to lead to revision of gas contracts with Russia

Domestic Bond Market
Government sells a tiny UAH 55m of Treasuries
Ukrtelecom — Pays installment on $500m loan; plans $400m CAPEX for 2011-13