The fear factor. How to restore confidence in the Ukrainian companies15 April 2016
How the perception of Ukraine by foreign investors affected the cost of Eurobonds
In 2014-2015, Ukraine faced almost everything that can intimidate any investor. Acute external challenges - occupation of the Crimea, the war in Donbas, a record fall in prices for metal ore and grain - coincided with the revolution. Foreign exchange reserves, which have steadily declined since 2011, have fallen to a critical minimum - $ 5.8 billion at the beginning of 2015.
A lean peace
All these factors, as well as coverage of the budget shortfall with the new hryvna emission led to a triple devaluation. The Ukrainian economy was in poor condition.
In 2015, the threat of sovereign default appeared indistinctly. In the spring, when a real risk of a moratorium on the foreign debts payment occurred, the Ukrainian sovereign Eurobonds were traded slightly above 40% of the nominal value. In case of a default, investors would ignore Ukraine for a long time.
They managed to avoid the default - creditors agreed to the restructuring of the external public debt. It reduced the pressure on foreign exchange reserves and gave a three-year grace period, during which Ukraine could have stabilized the economy.
See also - Debt restructuring. What does the decision of the Verkhovna Rada mean?
Resumption of Ukraine's cooperation with the IMF and the emergence of a government oriented towards reforms and European integration, inspired foreign investors with a glimmer of hope for a while. In the fall of 2015, Eurobond prices exceeded 90% of the nominal value for the first time in a long time on Bloomberg terminal screens. Unfortunately, permanent political turbulences is a characteristic feature of Ukraine, investors are gradually getting used to.
Therefore, another round of political crisis in February caused some "drawdown" of Eurobond prices, which the market has compensated with expectations that the new government would be formed.
If the sovereign debt restructuring is completed, the corporate sector has yet to negotiate with creditors in sharply deteriorating economic conditions. Most borrowers before 2014 expected that they could refinance their debts, but equity markets were closed for overindebted companies.
Companies having business in the Donbas faced the greatest challenges. Because of the war, the regional infrastructure has been destroyed, delivery of raw materials and commodities complicated. This led to a drop in production. In the case of Metinvest (the metallurgical holding of Rinat Akhmetov and Vadim Novinsky, - editor’s note), situation worsened because of the global drop in steel and ore prices, which began in the middle of 2014 and lasted until the early 2015. DTEK was affected by the devaluation of the hryvna.
In a situation with a limited cash flow and restricted access to capital markets, companies simply could not pay off debts. There was a need for restructuring.
See also - Akhmetov VS State: the causes of war between the Ministry of Energy and DTEK
Currently, Metinvest and DTEK negotiate with creditors on the new terms of restructuring. The market, taking into account all possible risks, assesses their bonds at 42 and 51 cents per dollar, respectively. For comparison, bonds of DTEK and Metinvest were traded in 2013 on about 90% of the nominal value.
The most negative story of recent years in the Ukrainian corporate market became the default of the Mriya Agricultural Holding. The company manipulated with reporting for a long time, overstated its profits and underestimated the size of the debt. In 2014, it was unable to refinance its debt and defaulted. In July 2014, the prices for the company bonds fell from 80% to 45% of the nominal value. The company could not suggest any feasible restructuring plan, and lenders had to take the business under their control. Today, Mriya’s bonds are traded at 8 cents per dollar, as investors still have a prejudice against the Ukrainian corporate debt, especially in the agricultural sector.
See also - Debt loop of Akhmetov: whether Metinvest will be able to pay its debts
It is important to note that not all issuers asked concessions from creditors. For example, the food producer MHP found an opportunity to repay its Eurobonds in time last year. Investors took into account that fact - the company's Eurobonds are valued by the market nearly at 90 cents per dollar face value, as before the crisis.
A similar return to "nineties" rates for several years is possible on the bonds of Metinvest and Ferrexpo (currently, bonds of Ferrexpo are traded at 70% of the nominal value) given the favorable situation in the world ore markets. But to do so, the companies have to complete a painful restructuring process, their owners - to limit their appetite for dividends, and thus restore the lost confidence of foreign investors.