16:48 PM Saturday, May 26, 2018
Secret Sauce Behind Ukraine's Brewing Bond Frenzy
Bloomberg’s Gadfly columnist says the stars – and the facts on the ground – align for successful launch of Ukraine’s bonds this week
image/svg+xml Kyiv Lutsk Rivne Zhytomyr Lviv Ternopil Khmelnytskyi Uzhgorod Chernivtsi Vinnytsia Chernigiv Sumy Kharkiv Poltava Cherkasy Kirovohrad Lugansk Dnipropetrovsk Donetsk Zaporizhzhia Mykolaiv Odesa Kherson Simferopol Sevastopol Ivano- Frankivsk

By Marcus Ashworth

(Bloomberg Gadfly) -- Ukraine is coming back to the
international capital markets for the first time since the $15
billion restructuring in 2015. A potential flood of investors
into this one makes a lot more sense than the flurry of demand
we've seen in some recent deals.

A 10- to 15-year bond for as much as $2 billion could price
this week. The timing couldn’t be better for the country, as
yields on existing 10 year debt have plummeted from 9.3 percent
in March to 7 percent now. Interest already seems substantial.

It's not just that emerging markets are red hot. Yields are
the lowest for four years and there is particular interest in
Central European debt, of which there's been relatively little
supply. Recent deals from Iraq and Tajikistan, and Belarus
earlier in the summer, proved the strength of demand.

IMF program steadies investor nerves

The key is the presence of the International Monetary Fund.
This deal is the next step in its plan to help Ukraine recover
from a recession bought on by revolution and conflict. The
arrangement calls for $1 billion in new money to be raised from
outside investors this year, rising to $2 billion next year and
$3 billion in 2019. A successful transaction this month will
instill investor confidence that Ukraine is fulfilling its side
of the bargain.

The plan seems to be taking hold -- about half the money
raised in the new bond deal will be new money. Ukraine is
tendering to buy back probably up to $1 billion of its existing
2019 and 2020 debt, which is trading a little above 5 percent.

It looks like holders of these notes are keen to keep them so
they can participate in the tender on Friday, and be assured of
an allocation in the (higher yielding) new deal. It's all to the
better, as success will ease Ukraine's struggle to make
repayments due before the end of the decade.

If Tajik bonds can sell...

So investors are looking at a big, liquid deal with a bit
of a premium to existing debt. It looks a much more logical bet
than first-time issuer Tajikistan, which does not benefit from
having an IMF safety net.

Few emerging market stories come without considerable
risks, which help explain the relatively high coupons to
compensate. For Ukraine, the ongoing conflict in the east, and
Russia's annexation of Crimea, have hit the economy hard. Buying
the debt of countries in which Russia still sees a vested
interest, and have a problem with corruption, requires nerves of

As the IMF has Ukraine’s back, with $8.4 billion already
committed, investors can take a more considered view. The fund
has said it will release a further tranche of $1.9 billion after
pension reforms are put into law, and the government sees that
happening in the coming weeks, according to Reuters.

With the tender and the new issue, the country's
lengthening its debt profile and bought some time to gin up its
recovery. Ukrainians are at an important juncture and have a
chance to get up off their knees. Investors seem willing to help
them up.

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

To contact the author of this story:
Marcus Ashworth in London at

This column does not necessarily reflect the opinion of
Bloomberg LP and its owners.

Slider Photo: A scene that New York and London investors like to see: President Poroshenko's team meets Wednesday with the IMF team, lead by visiting First Deputy Managing Director David Lipton. (UNIAN/Nikolay Lazarenko)

Posted Sept. 13, 2017

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