LONDON Aug 8 Ukrainian companies' dollar bonds
are lower than they've been for months on fears the country's
worsening economy, armed rebellion and dispute with Russia will
send more of them the way of agro firm Mriya, which has hinted
at a debt restructuring.
Mriya's bonds due 2016 and 2018
have halved in value since it told creditors last week that high
raw materials prices, weak sales and difficulty obtaining
working capital were forcing it to "take steps to restore its
Investors have taken this as portending a restructuring of
the bonds, which are trading at 45-50 cents in the dollar,
reflecting what creditors now expect to receive on each dollar
They fear Mriya could be only the first of many.
A prolonged recession and pro-Russian insurgency in eastern
Ukraine have slashed corporate revenues, while this year's 50
percent depreciation in its hryvnia currency has raised debt
servicing costs. Sales to Russia, its biggest trading partner,
Richard Segal, emerging markets strategist at Jefferies in
London, believes many companies will resist restructuring as
long as possible, but that politics and economics made "defaults
on the basis of distressed exchanges are likely".
Those risks were now just about completely reflected in bond
prices, he said.
The tumble in prices has been across the board, not even
sparing firms such as metals exporters Ferrexpo and
Metinvest that have dollar revenues. Metinvest's 2015 bond is
near 2-1/2 year lows, down 10 cents this month,
despite the CEO's assurance that restructuring is not being
Likewise, a 2015 dollar bond from chicken farmer MHP
has fallen 5 cents in August to
three-month lows around 96.5 cents, while power firm DTEK's 2015
and 2018 bonds have both lost 5
cents this month after Fitch cut the company's credit rating.
In its note, Fitch cited elevated refinancing risk as DTEK
must repay $1.2 billion in debt in 2014-2015.
There are signs of trouble on loan markets, too, with media
reports suggesting a steel producer based in eastern Ukraine had
asked lenders to postpone payments on a $500 million credit.
"If this situation continues we may see more corporates
coming out to say they are facing difficulties. Most bonds are
pricing some kind of restructuring, but I think we haven't seen
the bottom yet," said Andre Andrijanovs, a strategist at Exotix.
HEAVY DEBT SCHEDULE
There are many problems, the foremost being the repayment
schedule. Companies have external financing needs of $15.4
billion this year, the International Monetary fund says, a
figure almost on a par with Ukraine's hard currency reserves.
So cash-strapped firms have no chance of central bank aid.
The central bank estimates the private sector has around
$100 billion in external debt, with $11 billion in Eurobonds,
and hard-to-track loans and export credits comprising the rest.
Much of this, taken out during the emerging corporate debt
boom years of 2010-2013, is starting to mature. Companies and
banks will need to find $11.3 billion next year, the IMF says.
Second, companies' ability to raise cash is hemmed in by the
sovereign's CCC credit rating - eight notches into 'junk' - and
expectations of a 6 percent economic contraction this year.
Third, many firms have assets and revenues in the
violence-hit Donetsk and Luhansk regions, or in the Crimea,
which was annexed by Russia in March. And Russia - a key source
of investment and trade - has slapped a ban on Ukrainian goods.
MHP exemplifies the difficulties companies face. It said
this month that fighting in eastern Ukraine had forced it to
shut a farm that accounts for a third of its egg-hatching
capacity. Sales to Russia and its customs union partner
Kazakhstan - a healthy 20,000 tonnes in April-June 2014 - are
Similarly, DTEK produces 60 percent of its coal in the
Donbass region, while a third of borrowings come from Russian
banks, Exotix data shows. Two-thirds of Metinvest's sales are
from subsidiaries in the Donbass and almost a tenth of its
exports went to Russia last year, the data shows.
"Disruption of DTEK's operations in these areas ... is
likely to have a material adverse impact on its credit metrics,"
All the same, value may lurk in some beaten-down issues,
says Jefferies' Segal. For instance, a 300 bps rise since June
on Ferrexpo 2016 bond yield seems unjustified because its cash
position well exceeds the $500 million bond, he says.
And Max Wolman, a fund manager at Aberdeen Asset Management,
is holding on to MHP bonds - which pay a 10.25 percent coupon -
reckoning on rising exports to Asia and the European Union.
"In 2008 when these credits were under serious pressure MHP
stayed current on debt repayments," Wolman said of the
post-Lehman crisis when state oil firm Naftogaz defaulted.
"We think there is willingness to pay (at MHP), and ability
is there, too."
(Additional reporting by Natalia Zinets in Kiev and by Jose
Sureda Herrero of Thomson Reuters Loan Pricing Corp. in London;
Editing by Will Waterman)