The Ukrainian authorities have opened the book on the issue of the first bonds on the international capital markets since the Maidan protests broke out three years ago and ousted former president Viktor Yanukovych.
A total of $4bn worth of bonds will be issued between 2018-2019, the country's Finance Minister Oleksandr Danylyuk told reporters on September 16. According to the minister, the International Monetary Fund (IMF)'s programme agreed in 2015 with Kyiv allows the government to tap international markets. "These are our benchmarks. Of course, the sums could differ," Interfax news agency quoted him as saying.
However, some analysts have voiced concern that if the government can raise sufficient money on the market the IMF’s hold over the government will weaken and the reform programme it has been pushing will stall. The government has already been backsliding on promises: this year the IMF was insisting on three crucial reforms – pension, land and judicial – but the only reform likely to be completed this year is pension reform.
Earlier, Kyiv mandated JP Morgan, BNP Paribas and Goldman Sachs as bookrunners for its new Eurobonds issue. Ukraine's roadshows took place in London on September 11-12, in New York - on September 13, and Boston - on September 14. A global conference call for investors took place on September 15.
Ukraine is seeking to place Eurobonds for a period of 10 to 15 years. The move followed Danylyuk’s statements that Ukraine will return to foreign capital markets after receiving a new tranche from the IMF, as it would be "a positive signal" for investors. The IMF released a $1.5bn tranche earlier this year after the pension reform was passed in the first reading before the summer break. According to Danylyuk, the worth of the potential placement would be around $1bn (€0.93bn).
On September 17, the National Bank of Ukraine (NBU) said that Ukraine's gross external debt as of early July stood at $114.836bn, which is 1.16% more than at the beginning of the year.
The indicative pricing of the issue is a yield of 7.75%, however, given the success of far riskier recent bond issues the price could well be lower.
Investor demand for the bond is expected to be high as it follows on from a string of exotic and risky bond issues. Belarus issued a $1.4bn twin-tranche bond in June, which has preformed very well since, with spreads tightening by 100bp. And in September Tajikistan made its debut with a $500mn bond that yielded 7.125% and was heavily oversubscribed.
Bond investors are hungry for yield and banking on the general economic recovery in all these countries to underpin these bond issues. Russia restarted an effort to offer $4bn of swaps to lengthen the maturity of its debt – reversing earlier remarks on postponing the deal -- and is expected to issue the new bonds in September.
Ukraine’s economy has returned to growth after an extremely deep crisis that saw the economy contract by over 15% at its worst. Foreign currency reserves have also recovered to a little over $18bn, or some 3.8 months of import cover.
At the same time the national debt remains manageable. According to the new budget that is being considered by the Rada, the total amount of national debt in the national currency by the end of 2018 will be UAH1.999 trillion ($76.5bn), or 61.5% of GDP. Guaranteed debt, calculated in the national currency, will amount to UAH747.551 billion. State and guaranteed debt will amount to 84.6% of GDP.
Given the structure of government borrowings in 2017 and the projected borrowings at the end of 2018, the share of internal debt will be 37.6% of the national debt, and the share of the external debt - 62.4%. The calculations were made using the budget forecast for an exchange rate at the end of the year of UAH30.10/$1.