Ukrainian Bonds: Quality Corporates Offer Attractive Yields

UKRAINIAN EUROBONDS
The Ukrainian Eurobond market was generally weak over Sep. 12-16, with sovereign bonds outperforming. Sovereigns remained generally stable throughout the week but endured a major decline on Friday afternoon on news about the government’s plans to issue another $2.5bn of Eurobonds by year-end. Long-end Ukraine 21s finished the week at 101.5/102 (7.72%/7.65%). The corporate bond market suffered from lack of liquidity, with all major names declining. Even quality issuers such as MHP and DTEK saw sellers, their yields hitting 18-month highs. This week, bond markets are looking to further development of the Greek situation as well as results of the FOMC meeting expected on Wednesday.

UKRAINIAN DOMESTIC BONDS
The domestic bond market remained inactive against the backdrop of volatile banking liquidity, with correspondent account balances improving to UAH 18bn at the end of the week. At the same time, market players remain unsure as to how sustainable the latest liquidity easing is. The corporate bond market likewise was sluggish.

TRADE IDEAS
Despite the risk-off mood dominating, we recommend revisiting a number of corporate issues after their recent correction. We are fundamentally positive on Privatbank 12s (currently positioned on an inverted yield curve with a YTM of 12.1% and a 649bp spread over the sovereign), Ukreximbank 16s (10.8% YTM and a 382bp spread over the sovereign), Oschadbank 16s (10.4% and 345bp, respectively), MHP 15s (11.1% and 416bp), Metinvest 15s (9.9% and 297bp) and DTEK 15s (10.3% and 340bp).

WEEKLY NEWS DIGEST

Eurobond Market
Government borrowing plan for 2012 raises questions
IMF to review enacted pension reform, stays firm on gas tariff hike and watches 2012 budget draft
2012 budget draft: conservative plan, high implementation risks
Gross external debt up 2.2% q-o-q to $123bn in 2Q11; short-term external debt repayments at $53bn, exceeding pre-crisis high
Gov’t mulls extending grain export duties through June 2012
Government considers export duties on sunflower oil — negative for agricultural producers, mixed implications for crushers
Avangard — Fitch puts rating under review for potential downgrade
Mriya Agro Holding — Conference call notes

Domestic Bond Market
Primary Treasury auction fails again ahead of tightening redemption schedule
Ukrtelecom — Transfers cellular assets to new company