By Josie Cox
Ukrainian Finance Minister Natalie Jaresko's tour of Europe this
week has done little to placate fears that the country is hurtling
toward a costly default on its government bonds.
But now concerns are mounting that Ukraine's companies may face
the same fate. Economists are warning that a wave of corporate
defaults is all but inevitable.
The prolonged recession and conflict with Russia have for months
hit sales, and the foreign investors that companies need for
financing have stayed away from Ukraine even as they have taken on
more risk elsewhere.
On Tuesday, Moody's Investors Service slashed its rating on
Ukraine to "Ca," the second worst on its scale, saying the
likelihood that holders of government bonds will face big losses is
growing. A default by the government would hit companies' credit
ratings, too.
But that is not the only problem.
Ukraine's currency, the hryvnia, has plummeted more than 50%
against the dollar in the past year. That has made it cripplingly
expensive for companies that issued bonds in dollars but have
revenue in hryvnia to service that debt. Companies dependent on
imports from abroad, meanwhile, have to stump up much more cash to
buy their goods too, also hurting earnings.
Some foreign investors have been burned. Emerging-market asset
manager Ashmore Group PLC, based in London, reported on its website
that as of the end of last year it held Ukrainian bonds from more
than a dozen companies and banks, including Ukrainian power company
DTEK Energy BV, Ferrexpo PLC, Metinvest Holding LLC and MHP SA. It
had paid a total of $378 million for them.
The value of the bonds had fallen by almost 36% as of the end of
the year, data on Ashmore's site shows. A spokeswoman for Ashmore
declined to comment.
Several Ukrainian companies, including VAB Bank PJSC and
agriculture firm Mriya Agro Holding, defaulted last year, and this
year J.P. Morgan expects "most [Ukrainian] issuers to attempt to
restructure or extend upcoming bond maturities."
The U.S. bank expects the rate of default among companies in
emerging Europe to rocket to 8.6% this year, almost entirely driven
by Ukraine.
According to BNP Paribas data, Ukrainian companies have just
over $10 billion of external debt outstanding, the bulk of which is
junk bonds, but according to the International Monetary Fund,
Ukrainian companies have external financing needs of more than $15
billion this year including repayments of debt and coupon
payments.
"Any Ukrainian company whose performance is strongly correlated
to the performance of the economy is potentially at risk of
default," said Zeke Diwan, senior portfolio manager in the emerging
market fixed income team at Allianz Global Investors, which has
around EUR1.8 trillion ($2 trillion) of assets under
management.
So those who hold Ukrainian corporate bonds better have a strong
stomach.
Ariel Bezalel, a fund manager at Jupiter Asset Management,
bought some very short-dated bonds issued by national oil and gas
company Naftogaz at the end of last year.
"It was very reminiscent of picking up pennies from in front of
a steamroller," he said. The day the bonds came due earlier this
year, Jupiter started calling up the custodian to get the funds,
which didn't come through for a nerve-racking three days.
Since then, he hasn't been buying Ukrainian debt. "I think it's
a broken country, sadly," he said.
The IMF last week approved a $17.5 billion emergency loan as
part of a larger $40 billion international financial package
designed to keep the country afloat as Kiev's pro-West government
overhauls its creaking economy and contends with Russia-backed
separatists in the east.
Ukrainian companies that generate the majority of their revenues
in local currencies, but have debt piles in dollars are likely to
be the first to miss repayment deadlines and default.
Agricultural company MHP, which specializes in chicken farming,
has a $235 million bond due in April. It has $200 million in
prearranged funding in the form of a loan from the International
Finance Corporation, which is part of the World Bank group. Under
the terms of the loan, however, the IFC retains the right to cancel
or suspend the loan in the event of a significant deterioration in
the political and economic environment in Ukraine, according to
Moody's.
"IFC's decision on whether or not to advance funds to MHP this
month will be a further test of international support for the
country and its issuers," Moody's analysts wrote in a recent
report. A spokesman for MHP said the company was not
"operationally" in any difficulty. He declined to comment on the
debt situation.
DTEK, the power company, also has $200 million of debt due to
mature in April and said this month that it was seeking a long-term
deal to restructure. It has sizable assets in the parts of eastern
Ukraine scarred by fighting.
The company is domestically concentrated, with exposure to the
weak domestic operating environment, and sizable assets in the
areas subject to military action.
Still, there are some investors who believe that the worst is
over for Ukraine and that now might be an apt opportunity to buy,
considering that the market is already pricing in a total
default.
"The market is already trading at restructuring levels. Growth
in Ukraine is of course lacking, and not expected to return any
time soon but some companies look attractive if bought to be held
for the long run, " says Chris Edwards, a portfolio manager at FPP
Asset Management LLP, a boutique investor with a focus on emerging
markets, based in London.
The company has around $200 million in assets under management
and about $10 million invested in Ukraine.
Pat Minczeski and Christopher Whittall contributed to this
article.
Write to Josie Cox at josie.cox@wsj.com
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