Ukraine signs agreement for USD 1 bln in U.S. loan guarantees

The governments of the U.S. and Ukraine signed an agreement for USD 1 bln in loan guarantees on June 3, Ukraine’s Finance Ministry reported the same day. The funds will be raised from the placement of five-year bonds guaranteed by the U.S. government (at an expected interest rate of below 2%) and will be transferred to Ukraine’s state budget. These funds will be used to aid Ukraine’s most vulnerable citizens to protect  them from economic impacts, including hiked natural gas prices, the Finance Ministry said.

The agreement marks the third loan guarantee received by Ukraine from the U.S. The previous two, of USD 1 bln each, were issued in 2014 and 2015. The last guaranteed five-year Eurobond, in May 2015, was issued at a 1.847% YTM.

In other news, IMF Resident Representative in Ukraine Jerome Vacher told Ukrainian television on June 5 that Ukraine may receive the third tranche of USD 1.7 bln under the Extended Fund Facility program already in mid-July. This can happen if the IMF positively evaluates Ukraine’s reform progress in June, Vacher clarified. A final evaluation could happen as soon as late June, he said.

Alexander Paraschiy: The news flow of the last weekend looks positive for Ukrainian sovereign Eurobonds as it shows that the West is satisfied with what it sees in Ukraine in recent weeks. Recall, earlier IMF representatives indicated that decision on the third tranche will be made only in July.

Moreover, it was broadly expected that the U.S. guarantees would only follow the IMF’s positive decision. The signing before the IMF deal could be the U.S. government’s reward for the June 2 constitutional amendments aimed at depoliticizing the judiciary. Also, it looks like a sign that Western observers are quite optimistic about further reform progress in Ukraine and they expect smooth implementation of more IMF preconditions in the coming weeks.

The guarantees do not change our forecast neither for the hryvnia nor gross international reserves for 2016 since they were approved just one month before they were initially expected. On top of USD 1 bln in guaranteed Eurobonds to be issued by the Ukrainian government in 2016, we anticipate two IMF wires (USD 1.7 bln each) and a EUR 1.2 bln loan from the EU. The funds should boost gross international reserves to USD 18 bln by the end of 2016.