beyondbrics

It was hardly a surprise when Ukraine passed the bar for a $15.5bn IMF bailout. Desperate to plug a budget gap and stay financially afloat, Kiev caved in to unpopular but economically necessary austerity measures in recent weeks.

While painful for average cash-strapped Ukrainians, a nod from the IMF should reopen the door to international debt and capital markets. But in which currency?
Ukraine was expected in coming months to try (again) to raise some $2bn on international debt markets through a eurobond issue. Earlier this month, it cancelled a similar sized issue after balking at the prospect of paying more than 8 per cent on 10 year debt. Ukraine now hopes that with the IMF deal in place, it can secure cheaper money.

But there’s a growing question for bankers, bond investors and fund managers eyeing the country: could Ukraine opt for rouble bonds instead?

Triggered by the recent words from the Ukrainian government, speculation is spreading that the country’s Moscow-friendly leadership could consider an alternative to traditional eurobonds – by issuing bonds in Russian roubles. Prime minister Azarov’s comments today are sufficiently ambiguous to fuel the flames:

“In light of the (first IMF tranche of $1.9bn to be immediately received), we need to calculate how resources we have to cover the budget deficit. And in accordance with this, we will seek means to finance the gap, either by issuing Eurobonds, or by borrowing through other mechanisms.”

Nonsense, say many analysts watching the country; talk about a rouble issue is more about gaining market leverage than a serious alternative. Moreover, after recently completing a roadshow for a eurobond placement, bankers said Ukraine is much better prepared for such an issue as soon as the market conditions are right.

In contrast, a ground-breaking rouble bond issue would take more time to whip together, and could come along with costly strings attached from a Russian leadership that is eager to pull Kiev more into its orbit of influence.

But that argument may be moot. Whether it be a rouble or a eurobond, investors may look set to wait a while.

“Ukraine’s government is not going to rush to tap the capital markets with a bond issue in the near future,” says Alexander Valchyshen, Head of Research at Investment Capital Ukraine, a Kiev-based investment bank.

For one, the positive IMF decision was, for many investors, already priced in to the last eurobond issue attempt.

According to Valchyshen, “the government would better wait a month or two to see, firstly, credit rating upgrades from the current and shameful B level (by S&P scale). Then, they would wait for further spread compression over U.S. Treasuries of outstanding sovereign bonds (the bond due in 2017 now yields 6.7%). I think the government seeking to place a 10-year bond would be satisfied to pay a coupon at 7 percent as a ceiling when it appears on the market. A 6 percent coupon at such a placement should be met here as success.”

So, Ukraine’s investors look set for a rather protracted guessing game.