Non-residents share in Ukraine's domestic bond market tops 7% and is still growing

Non-residents share in Ukraine's domestic bond market tops 7% and is still growing
Foreigners owned 7.3% of the outstanding hryvnia-denominated bonds or UAH56.2bn ($2.1bn) as of June 27
By Ben Aris in Berlin June 30, 2019

The hook-up of Ukraine’s bond market to the Clearstream international payments and settlements system is turning out to be a stunning success. Foreign investment in Ukraine government hryvnia bonds has increased nearly eight-fold since the start of the year.

The share of non-residents holding Ukraine local bonds topped 7% at the start of June and shows no sign of slowing down.

Foreigners owned 7.3% of the outstanding hryvnia-denominated bonds or UAH56.2bn ($2.1bn) as of June 27, which already meets the borrowing plan for domestic issues sold to foreigners for this year. The total volume of hryvnia-denominated bonds issued this year was UAH772.8bn ($29.4bn) as of June 27.

The hook-up looks like it will become a significant new source of funding for the government, which faces a debt mountain this year.

Russia’s domestic debt market was transformed by a similar reform in 2012. It saw a flood of foreign investors arrive; they currently account for 30% of the outstanding OFZs issued, or about $25bn of bonds. Russia’s Ministry of Finance has come to depend on foreign investors as a source of funding, and they bought half the bonds issued in the first quarter of this year.

Foreigners bought half the bonds offered at a recent auction in Ukraine on June 11, according to the Ministry of Finance. Ukraine's finance ministry placed its debut six-year government domestic loan bonds for UAH3.42bn at 15.85% per annum, and over the half of the securities were bought by non-residents, Finance Minister Oksana Markarova said.

"Another victory! Six-year instrument at 15.85%! ... Most [buyers] are non-residents," she wrote on her Facebook page during a roadshow, which the finance ministry team is conducting this week to place new eurobonds.

"While we are completing meetings with investors in London about seven-year eurobonds denominated in euros and are preparing for a flight to Frankfurt, the finance ministry team is simultaneously implementing our debt management strategy for three years on the domestic market," the finance minister said.

The finance ministry managed to attract UAH6.59bn, of which UAH1.38bn was brought from another placement of two-year securities, UAH0.75bn of one-year securities, and UAH0.46bn each of three- and six-month bonds.

The finance ministry, compared with the auctions a week earlier, managed to slightly reduce the rate of placement of six-month and one-year bonds – respectively from 18.5% to 18.39% per annum and from 18.5% to 18.45% per annum. To this end, the seller refused additional demand in the amount of about UAH600mn. The rate for three-month and two-year securities remained at the same level – 18% and 17.95% per annum, respectively.

Ukraine is in something of a sweet spot for bond investors at the moment. June’s Eurobond issue was oversubscribed six-fold and bid final yield below the range set by the finance ministry. After drawing €6bn in bids, the finance ministry placed the seven-year €1bn bond at 6.75%  well below the 7% yield analysts were expecting. 

“Today’s strategic transaction is demonstrative of the continued investor support for our country,” Markarov said Thursday after the placement, which capped a four day, four EU city roadshow by her team. BNP Paribas and Goldman Sachs International acted as joint lead managers on the transaction.

 

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