THE BOOK-RUNNERS had two goals: to bring Ukraine back into the international capital markets and to position themselves for other lucrative mandates. The result was that early in June 2003, Ukraine launched its first new benchmark offering since the 1998 Russian crisis. Dresdner Kleinwort Wasserstein, JPMorgan and UBS steered the borrower to an $800 million 10-year bond issue. In September the trio led a $200 million tap.
"It showed that investors were absolutely happy with the credit risk," says first deputy prime minister and minister of finance Mykola Azorov. "We were looking at raising $800 million and on the roadshow had many negotiations with bankers and the book reached $5 billion."
A number of factors made the timing right this summer. The country's economic growth was better than expected. The rating agencies were generally approving. In 2002, a couple of reopenings of Ukraine's restructured 2007 bonds had stoked up some interest among investors for the credit. And, perhaps most significantly, Russia was one of the year's star performers in the international bond markets.
The $1 billion bond has now become one of the benchmark issues in the region and Ukraine is now one of the prime accounts. "There is not much left in this region which offers good yield and good volatility," says Jonathan Brown, managing director in fixed-income syndicate at JPMorgan in London.
Buyers have been well rewarded so far but there is a feeling that there is not much juice left in the bonds — especially with uncertainty about elections in October. On the other hand, what else is there? "Ukraine is a reasonably stable place to invest though it's not 10% [returns] but more like seven and a quarter these days," says Brown. "Having said that, unlike Turkey, which trades at similar levels, there is no risk of a huge supply of bonds."
The Ukraine bonds pay a coupon of 7.65% and were priced at par to provide a spread of 433 basis points over treasuries. Investors unsuccessfully tried to convince the ministry of finance to alter its original plans for a five-year offering and extend to 10 years.
Stretching maturities
"The yield was a good compromise between the desire of investors to make money on our bonds and our desire to place it with good conditions, and the next Eurobond will be taken with same approach," says Azorov.
The republic is due to issue another longer-term bond in the first quarter this year, and investment banks are clambering over each other to get a piece of the action. Whereas the first deal was a case of doing what a new issuer had to do, this time around the finance ministry is likely to take a more strategic approach. After all, it can afford to.
Ukraine has a stable current account so it does not have a great need to borrow, says Azorov. The importance of the sovereign bond issues lies in the access they provide for other Ukrainian issuers.
It did not take long before two more issuers – a municipality and a bank – prised open the bond market for their own purposes. In late July, the City of Kiev priced a $150 million five-year transaction, which was lead managed by the same three banks that did the sovereign deal. Kiev paid a spread of 560bp – around 200bp wide to the sovereign.
"The debut issue of the City of Kiev was very successful," says Victor Padalka, deputy mayor and chief of the central financial department at Kiev city council. "The Kiev bonds are quoted in the market at a higher level than the Ukrainian ones," he says. "As to the sale price in mid-December, the Kiev bonds are 106% from the nominal price and Ukrainian ones are 103% from the nominal price."
Kiev has adopted a range of new powers and obligations. From 1999 it has transferred 20% of its revenues into the state budget. And in June 2001, the Budget Code brought new changes, enabling cities across the country to seek internal capital and to widen their investor base.
The Kiev issue, although relatively small, attracted over 70 accounts – many of them buy-and-hold investors. This was despite the borrower's inability to extend the deal's maturity.
It was a five-year deal that the City had agreed with the ministry of finance and it was too late to change that. It was a lesson learnt. "Maybe we'll apply for 10 years next time and check all the variants rather than be connected with only the one option," says Padalka. "It was our first time – we're learning."
For the 2004 budget, he does not foresee foreign borrowings but is flexible and can make changes to the budget. The key issue in the Kiev council is how to borrow money for an estimated $500 million project to construct the Podilskyi Bridge and harbour drawbridge and a number of other projects.
A few other municipalities are big enough to apply for offshore issuance. But most are not in the same financial health as Kiev, and investment bankers do not see this sector as particularly fertile ground. Little has been heard about their plans to seek ratings.
Some are at least getting help from the European Bank for Reconstruction and Development. The bank has agreed to support a number of schemes, including water projects.
Ukrainian banks are now represented in the international credit markets, following the December success of Privatbank in selling $100 million-worth of three-year loan participation notes. That deal was lead managed by CSFB and the bond pays a coupon of 10.875%. A high coupon and short duration attracted the mainly European investors, including retail buyers.
Two other banks have lined up for issues in early 2004. Ukrsotsbank has mandated ABN Amro, and Ukrsibbank has chosen DrKW for similar sized three-year deals.
Apart from these three, the number of other banks that could come to the bond market is limited. However, a number have secured one-year bank loans from western bank syndicates at margins of 350bp plus.
As far as corporates go, bankers do not expect to see many bonds out of Ukraine in the near term. Only certain private companies have so far been audited: a process many companies will go through this year for the first time.