Issuer: Republic of Ukraine
Amount: $450 million
Launched: August 11
Lead manager: Nomura
Investment bankers rejoiced in the middle of August when Ukraine broke the summer lull in the Euromarkets with the launch of its first international bond issue. Ukrainian teachers too: part of the $450 million proceeds was used to pay off teachers' wage arrears, averting a strike that would have delayed the beginning of the autumn term.
Most features of Ukraine's path to the Euromarkets have been unusual. The Eurobond has been postponed and rethought several times since the country began talking in earnest with investment bankers last summer. For the past year, Ukraine had been planning to launch two benchmark bonds simultaneously in the international markets. One would be a Eurobond, denominated in dollars or Deutschmarks; the other a samurai in the Japanese domestic market.
Ukrainian foreign borrowing officials looked on enviously in November 1996 when Russia raised $1 billion of five-year debt at a very tight rate. The Ukrainians resolved to copy the systematic approach Russia took to prepare its debut Eurobond - hiring a ratings adviser and travelling on a roadshow - but they believed they could do it even better.
Earlier this year, however, it seemed there might not be a deal at all. Ukraine's IMF stand-by expired in February and the Fund declared that the country could not begin negotiations on a $2.5 billion extended fund facility until it passed a budget for 1997 and began tax reform. But parliament then rejected a series of tax reforms put forward by Viktor Pynzenyk, deputy prime minister with responsibility for economic reform, who quit in frustration in April. At the beginning of June, Ukraine still had no budget for 1997 and the government was more than $2 billion in arrears in pensions and state employees' salaries. The country seemed close to collapse.
The deadlock was resolved in July when a newly appointed finance minister, Ihor Mityukov, pushed a compromise budget through parliament and restarted talks with the IMF. Speaking to Euromoney in mid-July, Mityukov said that the government expected to obtain Japanese ratings at the end of August, with the samurai likely to be launched in September. The Eurobond, in dollars or Deutschmarks, would come later in the year. The Eurobond would probably have a five-year maturity while the samurai would be slightly shorter. "In later issues we will try to stretch the maturity to seven years," Mityukov added.
In early July the government announced that Nomura would lead the samurai, while Deutsche Morgan Grenfell had already been mandated as bookrunner for the Eurobond. Separately, JP Morgan was hired to advise the government on ratings and in late July the government announced that JP Morgan would be joint bookrunner of the Eurobond with DMG.
By mid-July, it was clear Ukraine was further advanced at preparing the samurai than the Eurobond. "We never planned it that way. But when we got into problems with the budget and couldn't renew our IMF agreement, we had to halt plans for the Eurobond," a government official explained in July. "Those factors don't matter so much in the samurai market."
However, talks with the IMF preoccupied Ukrainian officials once the budget was passed. An agreement in principle on renewing the stand-by facility was reached in the second week of August.
On August 11, without warning, Nomura launched Ukraine's debut Eurobond. By any standards, the $450 million deal was an oddity. It was a one-year zero coupon, making it a money-market instrument rather than the benchmark capital-markets transaction Ukraine officials had been planning from the outset. It was also unrated, limiting the number of investors.
The deal was opportunistic. The government needed to raise a lot of funds quickly to avert the threatened teachers' strike and prove to the population it intended to fulfil its promise to pay wage arrears. Although many investors were on holiday, the launch coincided with the announcement that Ukraine had reached an agreement with the IMF, which gave the deal an immediate impetus.
"This transaction fulfilled a number of objectives," says Dan Jackson, a deputy managing director at Nomura in London. "Ukraine wanted to find an alternative source of finance to its domestic T-bill market. At the same time, it was trying to raise its reputation in the international markets ahead of its planned long-term issue."
The one-year deal was extremely successful. At its re-offer price it yielded 325 basis points over Libor. This attracted demand from investors who had bought Ukrainian T-bills and hedged the currency risk, as well as from foreign banks that had subscribed to Russian banks' syndicated loans. The pricing was regarded as cheap for Ukraine and the bonds rose in the after-market to 280bp over Libor on an asset-swapped basis.
At DMG and JP Morgan, officials sidestep the question of whether they knew in advance about the one-year deal, saying they are pressing ahead with preparations for a medium-term benchmark Eurobond. "We are taking a systematic approach," says Peter Schikaneder, a director of global markets at DMG. "We are preparing for presentations to the ratings agency and the roadshow."
The next step is to obtain ratings from Moody's and Standard & Poor's. For Ukrainian government officials winning ratings at least as high as Russia's is a matter of national pride. "Our rating will depend on negotiations with the IMF and the draft budget for 1998," said Mityukov in mid-July. "It is realistic for us to achieve at least the same rating [as Russia]."
The ratings process will test Ukrainian government officials' communication abilities to the limit. Only a handful of them understand how the economy works - and ever fewer seem capable of describing it coherently or answering direct questions.
Other local observers argue that Ukraine's economic credentials make it a better credit than Russia, which is rated Ba2 by Moody's and BB minus by S&P. "Ukraine's rating could be as high as BB+," says Olexander Savchenko, head of Creditanstalt's representative office in Kiev. "That's because Ukraine has a better macroeconomic situation than Russia, with foreign exchange reserves and exports rising sharply."