The yield on Ukraine's 2028 dollar denominated Eurobonds surged 147bps to 10.91% on MArch 12, effectively shutting the country out of the international capital markets as it faces more than $5bn of debt repayments this year.
“Effectively, Ukraine is now excluded from international finance. It took President Zelenskiy one day (March 4) to undo the macroeconomic stabilisation pursued since 2014. Now Ukraine needs the IMF,” Anders Aslund, a Swedish economist and a senior fellow at the Atlantic Council, said in a tweet.
The rates Ukraine has been charged for international bond placements tumbled in the last year as enthusiasm soared for newly elected President Volodymyr Zelenskiy and his promise of change.
But the mood has soured dramatically in the last month, especially following the March 4 government reshuffle that saw many of the young technocratic reformers sacked from their ministrial posts. Investors have been further fazed by the timing of the reshuffle as the double whammy of coronavirus and oil price collapse exacerbates uncertanties.
Ukriane has also been able to raise some $5bn from foreign investors' participation on the domestic debt market that was hooked up the Clearstream international settlement and payment system last April. There too yields have tumbled over the last year, but investors have pulled back in the last few sessions following an emerging market selloff on the last day of February.
A deal with the International Monetary Fund (IMF) is gaining increasing significance. Agreed in principle in December, Kyiv has not been able to close the deal worth $5.5bn. The IMF has been insistant on various reforms that the new government has yet to delieve on, chief amongst them being a new law that would prohibit the government returning a bank to a former owner if it had been nationalised. Oligarch Ihor Kolomoisky has been pressuring the government to return his bank, PrivatBank, with an onslaught of legal cases and open harrassment of senior officials at the National Bank of Ukraine (NBU), including violence and arson attacks.
Ukraine could be facing a debt crisis later this year if the IMF deal falls through. Cut off from the debt markets, the government can only finance scheduled debt payments of $5bn from its gross international reserves (GIR).
Reserves amount to $26.6bn (as of the beginning of March), remaining the only available source to deal with Ukraine’s external payments of around $5bn in 2020. "With evolving turmoil on the international markets, Ukraine’s chances for external borrowing are next to zero. In this situation, securing IMF financing in the nearest future is a critical necessity," Evgeniya Akhtyrko of Concorde Capital said in a note.
The sliver lining form the current sell off is Ukraine could use it to retire its GDP warrants, instruments it offered bond holds are part of a restructuring deal five years ago. The problem with the warrants is as Ukraine’s economy started to grow the potential payout to investor threatened to run into the billions of dollars. Now they are cheap again.
“Ukraine 2040s, GDP warrants hit 110 a few months back - the darling of the market, with one sell side shop suggesting a fair value of 195,” Tim Ash, Senior Sovereign Strategist at BlueBay Asset Management said in a note to clients. “ They have dropped close to 40 points since, amid concern around the cabinet reshuffle, and then global market concern. If the Ukrainian authorities wanted to stabilise sentiment around Ukraine they might like to think about buy backs - they can now retire these instruments cheaply. A buy back would have cost $3.7bn a month ago, now its down to $2.4bn.”