Ukraine bond poses dilemma for banks

Mon Apr 28, 2014 3:52am EDT

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By Sudip Roy

LONDON, April 28 (IFR) - Arrangers of a potential US government-guaranteed bond from Ukraine face a delicate decision about whether to get involved in such a politically charged transaction, according to bankers.

Ukraine could issue a bond after the US Treasury signed a US$1bn loan guarantee with Kiev earlier this month as part of an internationally co-ordinated effort to support the troubled country. US banks are expected to lead any transaction.

But as the stand-off between Ukraine and Russia threatens to turn into a full-blown military conflict, some bankers say the decision to work on the deal is far from straightforward.

"Just to get the internal approvals huge," said one, who suggested that at his firm discussions would need to include several senior officials.

He added any bank considering taking on the transaction would have to weigh up the potential cost to its Russia business.

"There is the risk of association with the new Ukrainian government. How will it be perceived in Moscow?"

Others, though, dismiss such concerns. "Russia needs a solvent Ukraine," said one source, adding that the financial relationship between the two countries is complex and nuanced. Russia, for example, provided Ukraine with US$3bn of funds through a two-year bond in December.

Another banker also doubted that any firm involved would see its Russia business suffer. "You never know with [the Russians] but I can't see there will be retribution."

So far there is no public mandate. Bankers speculate, however, that Morgan Stanley could be one bank involved. The bank has a strong track record of arranging bond issues by the Ukrainian sovereign. Morgan Stanley declined to comment.

With Ukraine facing a US$1bn bond redemption on June 4, sources say it would make sense for the sovereign to issue the bond as soon as possible. "They may as well get on with it," said a capital markets chief, who added that a bond was an easy way of monetising the loan guarantee.

"The bond can be done quickly," he added. "It's a two-day process. They just need to finalise approvals."

The structure of the bond would be similar to that of previous US government-guaranteed deals by emerging markets sovereigns, according to a source with knowledge of the transaction.

Last year, for example, Jordan issued a US$1.25bn seven-year bond backed by the US Agency for International Development that priced to yield 2.503% at a final spread of 60bp over US Treasuries. The US has also guaranteed deals for Tunisia and Egypt in the past.

Last Thursday, Ukraine's first deputy finance minister Anatoliy Myarkovsky told reporters that Ukraine hoped to raise funds through a variety of sources including IMF loan tranches, World Bank funding, EU support, US guarantees, Eurobonds and domestic borrowing. (Reporting by Sudip Roy; Editing by Matthew Davies)

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