Ukrainian Bonds: Sovereigns Dip on Negative Sentiment, Corporates Mixed

UKRAINIAN EUROBONDS
Ukrainian sovereign bonds finished last week lower with the negative external environment pushing their spreads wider. The long end of the curve lost around 0.5-0.75 points with Ukraine 20s and Ukraine 21s finishing at 102.25/103.25 (7.40%/7.25%) and 102.5/103.5 (7.57%/7.43%), respectively. Naftogaz slipped to 105.5/106.0 (7.44%/7.26%). Meanwhile, quasi-sovereign names finished the week firmer: Oschadbank 16s saw buying support in the 96.0/96.5 (9.36%/9.22%) area and Ukreximbank 15s at 100.5/101.0 (8.21%/8.05%). Corporates showed mixed dynamics — FXPOLN 16s moved up 1.5 points to 93.5/94.5 (9.67%/9.38%), while DTEK 15s slipped to 100.75/101.75 (9.25%/8.92%).
This week’s activity on the Ukrainian market will highly depend on global markets’ dynamics. Among key domestic events should be submission of the 2012 state budget draft to parliament on Sep. 15. We also anticipate VAB Bank 1H11 IFRS results to be published in the coming days.

UKRAINIAN DOMESTIC BONDS
Last week was very difficult for the domestic bond market as banking liquidity dropped below UAH 10bn, which was the lowest level since September 2006. As a result, money market rates maintained very high levels during the week, with buyers dominating. Activity in the corporate segment was very limited

TRADE IDEAS
• We recommend buying Oschadbank 16, trading at a 10.2% YTM and a 289bp spread over the sovereign curve. Oschadbank has reported quite good 1H11 IFRS results with net income of $85m (8% ROE, or more than double the level under UAS), above- market lending growth (+30% YTD excl. Naftogaz Ukrainy), decreased share of loans to Naftogaz (-6pp YTD to 45%), strong inflow of customer deposits (+32% YTD) and solid capital adequacy level (33%).
• We also recommend buying MHP 15s, trading at a 9.5% YTM and a spread of 362bp over the sovereign curve. MHP 15s are underperforming peer DTEK 15s and Metinvest 15s, whose current sovereign spreads are 100-120bp lower.
Expectations of a strong corn harvest in Ukraine (over 18 Mt in bunker weight or +51% y-o-y) bode well for the issuer. We expect MHP to harvest about 850 kt of corn (+73% y-o-y), more than satisfying its annual needs in terms of fodder. We think the company will be able to sell over 30% of the projected corn harvest on the market, supporting its 2011 revenues and profitability.

WEEKLY NEWS DIGEST

Eurobond Market
Central budget revenues up 26% y-o-y in 8M11
Parliament passes revised pension reform bill, focus shifts to gas issues
Gov’t considers partial extension of $2bn VTB loan
Gov’t to increase UKRINF 7.4 11/18 bond by $92.5m, mulls new sovereign issue
Oschadbank — Publishes good 1H11 IFRS results
Mriya Agro Holding — Reports strong 1H11 results

Domestic Bond Market
Primary Treasury auction fails again as demand remains close to zero
Sberbank of Russia — Ukrainian subsidiary to place UAH 1bn of local bonds
VTB — Ukrainian subsidiary to place UAH 1bn of local bonds
Ukrtelecom — Cellular subsidiary valued at 6% of parent company