Corporate bondholders fret as oligarchs suffer under Ukraine crisis

By bne IntelliNews June 20, 2014

Nick Kochan in London -


Ukraine’s security crisis is hitting bond investors in some of the country’s largest companies. A combination of the deteriorating economic situation, falling currency, increased Russian import duties on Ukrainian goods and rising gas prices has meant big local firms are struggling to meet coupon payments and are in danger of defaulting on their debt.

A series of Ukrainian companies linked to key oligarchs like Rinat Akhmetov, Ihor Kolomoisky, Victor Pinchuk and Dmitri Firtash are thought to be in increasing difficulty as a result of the critical financial and the economic situation due to the unfolding crisis in the country. This is vividly illustrated by Russia closing down the Crimean plants belonging to companies owned by newly elected President Petro Poroshenko after it annexed the peninsula in March.

Take for example Interpipe, the industrial group belonging to Ukrainian oligarch Pinchuk, which is already in real trouble. The company has not defaulted on its $200m worth of bonds yet – it paid the last coupon in February – but it has already been marked down to "restricted default" by the global rating agencies. Philipp Thomas, a lawyer acting for a fund that holds Interpipe's bonds, said: "It is ever more doubtful whether Interpipe is going to continue paying the coupons and eventually the principle on its notes. Covenants in the agreement have already been breached. They are close to default."

This view is shared by Dimitry Churin, head of research at Eavex Capital, a Ukrainian banking and investment group. "Many portfolio managers are not allowed to invest in this bond, as it is considered junk by credit rating agencies. Interpipe bonds are regarded as high risk and there is a strong likelihood that they could be restructured again," Churin says, referring to the fact the bonds have been restructured on a number of occasions in recent years.

The company's troubles are reflected in the price of its bonds, which have fallen to 80 cents of par value while yields have soared to close to 20%. That compares with the 89 cents on the dollar investors are paying for bonds of MetInvest, the biggest steel and mining group and part of the industrial group controlled by Ukraine's richest oligarch Akhmetov, which were yielding 12.5% at the time of writing.

Ukrainian bonds have always been risky, and the opacity of the issuers only adds to the difficulties as the political and economic situation in the country continues to deteriorate. "Minority bondholders are dependent on the decision of the majority bondholder and we understand he is in a friendly relationship with the Interpipe Group. Most portfolio managers who deal with this bond understand that all decisions are made by Interpipe Group and its founder Pinchuk," says Churin.

Interpipe did not respond to a request for comment.

Pinchuk is an extremely high profile figure in Ukraine. He is married to the former president Leonid Kuchma's daughter and counts amongst his friends Tony Blair and Bill Clinton. But his company, Ukraine’s largest maker of steel pipes and steel railway axels, is based in Dnepropetrovsk in the increasingly insecure Russian-speaking east of the country.

Interpipe was already struggling under the weight of the economic crisis that has afflicted Ukraine since the global meltdown in 2008. It has repeatedly failed to publish its financials; the last time it released a set of accounts was in 2012.

Interpipe's bonds have already been delisted from the Luxembourg stock exchange in 2010, and despite requests to Interpipe from the Trustee to relist them – a requirement stipulated by the original covenant – they remain unlisted. Deutsche Bank, which is acting as the trustee for the bonds, issued a notice last December that said the failure to relist the bonds was an "act of default." Rating agency Fitch Ratings reacted last year by downgrading the company to default.

Any failure by the company to pay its coupons could be the final nail in the coffin for minority shareholders who have had, in the words of one, a "very rough and rocky ride" over the seven years since the bond was issued. Minorities have watched helplessly as the date for the return of their investment has been postponed and the coupons they are owed by the company delayed.

What is worse is that Churin's analysis of the company’s cash flows shows it has the money to meet its obligations and pay the coupons. But Churin warns that Interpipe has substantial foreign currency debt, and servicing this will become more expensive as a result of the hryvnia's devaluation. This is because a devalued Hrivnia buys fewer dollars, so if a company needs to buy dollars to pay a debt denominated in dollars, it will spend more hrivnia to service the debt. By the same token, companies rich in foreign currency will be in a better position to pay internal debt denominated in hryvnia.

Concorde Capital in Kyiv has advised clients to be very cautious when picking Ukrainian bonds. "In picking the bonds that are due to mature in 2014-15, we have focused on an issuer’s ability to autonomously repay all its debt maturing by the end of 2015. Among the issuers of 2014-15 bonds, we prefer [egg producer] MHP and [Donetsk-based] PrivatBank, while we see a high risk of restructuring for [Akhmetov's power company] DTEK and [state-owned export orientated bank] Ukreximbank. A special case is state monopoly Naftogaz, as we expect the state will help to repay its bond smoothly. We believe the bond of First Ukranian International Bank [PUMB] trades too cheaply since the bank should be able to repay it, even in the worst scenario."


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