Ukraine to issue $1bn in domestic bonds

By bne IntelliNews May 24, 2012

bne -

Ukraine plans to issue $1bn worth of domestic bonds to raise funds to pay down a loan from Russia's VTB, as it seeks routes to reduce the fiscal pressure it is currently under.

Kyiv says it will use the proceeds from the sale to pay down half of the $2bn loan from the Russian state-controlled bank that is due in June 2012, Economy Minister Petro Poroshenko told journalists on May 23. "The decision has been made that $1bn of government bonds will be issued for a period of two years at an interest rate considerably lower than current market quotes," Poroshenko said, according to Interfax.

"I think that the Finance Ministry and government have carried out very professional work and found a compromise that will remove the debt burden on payments for this year by the above amount. Also, the risks for our gold and foreign currency reserves will be removed," the official added.

However, Poroshenko also indicated that Ukraine is actually considering paying no more than $500m of the loan off, with a further $500m to be rolled over yet again by VTB. Given Ukraine's precarious fiscal position, the loan from VTB offers Moscow no little leverage over Kyiv, as Russia pushes for control of the country's gas pipeline network, and for it to join the Eurasian alliance currently being built.

The $2bn bridge loan at 6.7% was issued in June 2010 and has been rolled over three times since then. In November 2011 Prime Minister Mykola Azarov said that an agreement had been reached to turn the loan into a long-term facility, but this seems not to have come to fruition.

The bonds will be placed at below-market yield and should be redeemed in two years. Ukraine started repaying loans to the International Monetary Fund in 2012, but has been reported to have requested a restructuring of the payment schedule. In 2013, Ukraine is due to repay $7.7bn to the international lender.

The repackaging of the VTB debt as a domestic bond issue will postpone repayment of the half of the loan to 2014 reducing the pressure next year, Dragon Capital analyst Olena Bilan suggests.

Reports in local media on May 21 said that the Finance Ministry had reached an agreement with VTB on the partial repayment/restructuring of the loan. According to the deal, $0.5bn will be repaid upon maturity in June, $0.5bn will be refinanced with another VTB loan, and the remaining $1bn will be refinanced via the issuance of Eurobonds, likely to be purchased by VTB. The new loan and Eurobonds will be issued at market rates, reports Concorde Capital.

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