Ukraine’s public debt service needs this year peak in May (USD 1.4bn) and September (USD 1.6bn), according to a research note published by Kiev-based Investment Capital Ukraine (ICU). Quasi-sovereign repayments are also on investors’ radar, notably Ukreximbank’s USD 411m 2022 bond amortisation and coupon due in April.

Ukraine is in line for the next two tranches of its USD 3.9bn stand-by arrangement (SBA) with the International Monetary Fund (IMF) due in May and November, as well as USD 1.2bn from the European Union and World Bank guaranteed loans. The 14-month SBA was agreed in December when the first USD 1.4bn tranche was disbursed.

To avoid pressure on FX reserves, Ukraine will also have to issue around USD 1bn-USD 2bn Eurobonds in 2019, ICU analysts say, of which USD 350m were recently added on to its 9.75% 2028 note.

Quasi-sovereign debt repayment has been smooth so far this year, with state-owned bank Oschadbank paying a lumpy USD 420m in amortisation, and Ukraine Railways showing enough cash on balance sheet to meet a USD 150m amortisation payment due on 15 March, despite pulling a Eurobond sale last year.

The government remains committed to ensuring quasi-sovereign liquidity, most recently extending a USD 139m debt repayment from Naftogaz to Oschadbank due in June until 2020, further increasing the spotlight on government solvency.

Toeing the IMF line

Both multilateral funding and Eurobond issuance are highly reliant on IMF compliance, which Ukraine has struggled with in the past. After almost two years of delays and reform impasses, the IMF finally agreed to the SBA last December. With a first-round presidential victory on 31 March widely discounted, investor focus is on how likely the three main candidates are to keep the reform momentum and IMF funding going.

Comedian and political outsider Volodymyr Zelenskiy is leading the polls since January, but incumbent Petro Poroshenko and former prime minister Yulia Tymoshenko remain strong contenders.

Tymoshenko has been the Fund’s most vocal opponent, whereas Poroshenko, under whom the current SBA was agreed, is seen as the candidate of continuity, two Kiev-based analysts said.

“Our [international] clients are definitely more cautious about Tymoshenko,” said the first Kiev-based analyst. “No matter how much she changes her [anti-IMF] views when she sees how much the country needs the money, her election will bring a sell-off in Ukrainian assets, especially by risk-averse investors."

Zelenskiy’s political inexperience makes him harder to predict, and, unlike his two rivals, he will not have a strong backing in parliament even if he wins the presidency, the Kiev-based analysts said. Given that cabinet wields most of the economic decision-making power, investors will likely have to wait until after the October 2019 elections to see what a Zelenskiy presidency holds, research from Kiev-based investment firm Concorde Capital noted.

Still, Zelenskiy too is expected to heed to the Fund’s demands out of necessity, the Kiev-based analysts agreed. His recent association with Western-friendly figures such as Oleksandr Danylyuk and Aivaras Abromavicius, former ministers of finance and economy respectively, strengthens this point.

“The bottom line is that Ukraine is extremely reliant on the IMF,” said a London-based political risk analyst. “Hard economic reality will prevent any candidate from straying from the programme’s reform requirements, and it will continue to be a case of making the necessary calls, even if they are often made at the last minute.”

“Poroshenko will continue to reluctantly carry out reforms, such as ensuring that the National Anti-Corruption Bureau of Ukraine (NABU) becomes functional,” the political risk analyst continued. “For all her bravado and populist narrative, Tymoshenko will fall into line once she is faced with the cold hard facts. And Zelenskiy has signaled that the country will ‘pay its dues’.”

Friends with the oligarch

Aside from their willingness to comply with IMF guidelines, investors have to contend with how each candidate fits into Ukraine’s complex oligarchic network.

Billionaire businessman Ihor Kolomoisky has dominated election coverage and speculation is rife about his backing of the Zelenskiy and Tymoshenko campaigns.

Kolomoisky is the former shareholder of Ukrainian lender Privatbank, which was nationalised in 2016 and recapitalised by the state to the tune of UAH 116.8bn (USD 4.34bn). Kolomoisky and former Privatbank co-owner Gennadiy Bogolyubov face fraud allegations related to the bank’s downfall and are contesting a USD 2.6bn asset freeze sought by Privatbank in London’s High Court.

Privatbank’s nationalisation and the litigation are highly politicised events, and the new president will have substantial sway on how they unfold, the Kiev-based analysts said.

"The chance that creditors will be able to recover any of the bank’s bailed-in Eurobonds will significantly improve in the event of the victory of candidates who are considered, or confirmed, to be sponsored by Ihor Kolomoisky," Concorde Capital's research note reads. "Kolomoisky and his partners are among the largest holders of the bank’s Eurobonds, so they are highly interested in their recovery."

Zelenskiy has denied having an agreement with Kolomoisky, but their business ties, notably through the airing of Zelenskiy’s TV show on Kolomoisky’s 1+1 channel, have led to widespread belief that Kolomoisky is funding the comedian’s campaign in exchange for business favours when in office.

Tymoshenko is also said to be allied with Kolomoisky, having allegedly facilitated corrupt deals involving Kolomoisky and energy company Ukrnafta during her tenure as Prime Minister.

The first Kiev-based analyst believed there was little chance of a full reversal of Privatbank’s nationalisation or of recovery of its bailed-in bonds, but added that the litigation against the former owners could “fade away” in the case of a Zelenskiy or Tymoshenko win.

Still, Zelenskiy has recently denied any links to Kolomoisky, and has sought to surround himself with the oligarch’s enemies. “[Former Finance Minister] Danylyuk took an active role in the nationalisation of Privatbank, so bringing him into the Zelenskiy campaign should dispel fears of Kolomoisky’s influence,” said Alexander Paraschiy, head of research at Concorde Capital. However, he noted that Zelenskiy has so far not said what role, if any, Danylyuk would play in his potential cabinet.

Too close to call

Although most polls and local bookmakers show Zelenskiy leading, it is less clear who will make it to the second round alongside him, and predictions struggle to keep pace with the flurry of headlines.

“Polls must be taken with a pinch of salt, they have a five-day lag and this is a long time given how volatile the situation is,” said Concorde Capital’s Paraschiy, adding that around 25% of voters are undecided. Some polls have this figure closer to 40%.

Like in many other countries, the population samples used in polls in Ukraine do not always accurately reflect voting figures, Paraschiy added. “Tymoshenko’s lead is likely understated, she has a strong base in rural areas which are not well captured by polls. Similarly, Zelenskiy is polling strongly among younger voters, but turnout among this group is notoriously low.”

“Poroshenko's popularity was damaged by the corruption allegations [related to defense contracts secured by his allies], but the benefits from the one-off payments he promised to pensioners are starting to show in the polls,” Paraschiy argued.

Back in London, Bluebay economist Tim Ash believed that support from political heavyweights could be a "game changer" for Zelenskiy.

"Danylyuk and Abromavicius coming out for Zelenskiy […] could mark him out as the candidate for reform, change and youth," Ash said. "Poroshenko is the candidate for the status quo, security and stability. Tymoshenko is more for the older more conservative electorate, with a populist tone."

Ploughing the fixed income field

All this uncertainty makes conviction trades hard in the Ukrainian fixed income space. Ukraine’s sovereign bond yields have fallen 150bps to 200bps since January, but this is mainly due to their “hyper high-beta" status in a benign EM environment, a Zurich-based buysider said. The buying abated somewhat last week and election caution has settled in, the first Kiev-based analyst said.

In the sovereign space, Concorde Capital predicts that a Poroshenko win will push yields down 50bps to 150bps in the short-term as IMF compliance could be expected to continue. A Tymoshenko win could lead to 50bps to 150bps widening as delays to the IMF tranches would become more likely. A Zelenskiy win proves harder to predict, with Concorde Capital forecasting between a 30bps tightening to a 50bps widening.

In the corporate space, energy producer DTEK, controlled by Rinat Akhmetov, is one of the more politically sensitive names because of its exposure to electricity sector regulation. The company has enjoyed leniency and favourable  thermal electricity pricing regimes under Poroshenko’s presidency, and either a Tymoshenko or a Zelenskiy win will likely widen its spread to the sovereign curve, Concorde Capital analysts argue.

DTEK’s USD 1.3bn 10.75% 2024 restructured bond is one of the highest yielding Ukrainian name, although the EM rally has driven yields down 200bps since mid-January to a 10.81%-bid, according to IHS Markit. Much like the sovereign, DTEK yields have remained broadly flat over the last week.

On the other end of the spectrum lies steelmaker Metinvest, also part of Akhmetov’s portfolio, which as an exporter is one of the least exposed to Ukrainian political risk. Yields on its USD 825m 7.75% 2023 bonds have also compressed 200bps since mid-January, but this has been mainly down to high steel prices as well as broader EM positivity, Concorde Capital’s Paraschiy argues.

Photo: Marco Verch Flickr

Laura Gardner Cuesta Senior Reporter Debtwire CEEMEA

Laura is a sovereign debt senior reporter for Debtwire CEEMEA. She holds an MSc in Conflict Studies from the London School of Economics and a BA in Philosophy, Politics and Economics from the University of Exeter.