Pressure grows on Ukraine corporate bonds

Ukraine's war with pro-Russian separatists and severe economic fragility have shaken investor confidence in the solvency of the country's banks and companies, leaving some of their biggest corporate names struggling to pay their debts.

While the government has secured a bail out from the International Monetary Fund and is in negotiations with creditors, Ukraine's corporate sector has been completely shut out of international capital markets.

Bonds issued by some of the country's largest companies are trading at less than half of their face value.

"The macro environment and the military conflict are huge," said Fyodor Bagnenko, a bond trader at Ukrainian investment bank Dragon Capital. "All issuers with very rare exceptions are trying to do some liability management."

Ukraine's corporate sector is playing for time as international bondholders hover and its falling currency - the hryvnia - inflates dollar-denominated debts.

Some key industrial players have already entered into voluntary restructuring with creditors, including the biggest iron ore miner Ferrexpo, and the largest steel producer, Metinvest, which controls half of Ukraine's steel market, both for bonds worth $500m.

The biggest private energy company, DTEK, is seeking to restructure a $200m bond, after many of its power plants and mines, which are concentrated in the conflict zone in the east, were damaged and destroyed by shelling from rebels and the Ukrainian army.

The energy group's owner and Ukraine's richest man, Rinat Akhmetov, has seen $5.8bn wiped off his fortune in the past year, according to Forbes.

"Two years ago, bond trading was driven by balance sheets," said Mr Bagnenko. "But when the situation was really deteriorating, everyone in the market changed into geopolitical analysts."

Last year, several companies went bankrupt, including agricultural firm Mriya Agro and VAB Bank, and further defaults will follow if the background situation does not improve, according to Moody's, one of the world's leading credit rating agencies.

The hryvnia has lost 50 per cent in the past six months and emerged as the world's worst performing currency this year, making it more expensive for companies that borrowed in dollars but earn money in hryvnia to service their debts.

Meanwhile, the tightening of Kiev's foreign currency controls at the start of March, as well as capital flight and weak banks, has left the country's corporate sector facing a liquidity squeeze.

"There's a credit crunch in the banking system, deposits have fled and there's a lack of demand from an already low level - even before this latest crisis began, the economy was under-developed," said Richard Segal, analyst at Jefferies.

Jason Trujillo, emerging markets analyst at Invesco, said the operating environment for companies in Ukraine had become extremely challenging over the past 12 months.

"Perhaps one of the biggest problems, is that, across sectors, foreign suppliers of key input materials, such as fertiliser, are demanding upfront payments before sending goods. This is a significant departure from the previous standard of 60-day payment terms," he said.

Some of the biggest investors in Ukrainian corporate bonds include Ashmore, a UK-based emerging markets fund manager, and Franklin Templeton, a US fund manager.

"In time, the market will learn how to live in parallel with a slow brewing, frozen conflict, but as long as the risks are there that the conflict could boil over, it won't be stable," said Mr Bagnenko.

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