Last June, Ukraine returned to the international capital markets with its first bond issue since 1998. In February, it consolidated its rapidly improving reputation with international investors by launching a much more competitively priced $600 million seven-year transaction. In an interview with Euromoney’s Nick Parsons, Anatoliy Shapovalov, deputy minister of finance of Ukraine and head of sovereign borrowing, talks about the country’s borrowing objectives.
How important was it for Ukraine to access the international capital market last year? Our appearance was extremely important because it was the first issue after the restructuring (except for a $399 million tap issue of 2000 Eurobonds in November-December 2002). Until that date, investors could purchase only amortizing 2000 Eurobonds due 2007. However, they were not very attractive and liquid instruments because of the amortizing repayment scheme and the fact that they were restructured paper.
Last year’s issue showed investors’ trust in new Eurobonds. A 7.65% yield was achieved and the maturity term is rather significant – 10 years. Demand amounted to $5 billion – exceeding by a factor of six the amount of $800 million. The issue was carried out under the Regulation S/Rule144A for the first time, providing a high level of information disclosure and transparency.
What were you hoping to achieve with the second Eurobond in February this year? First, the construction of a yield curve – through the issue of bonds with a seven-year maturity term; secondly, we created a benchmark for corporate issuers, since Russia has a huge domestic market but is dependent on oil and gas, whereas Ukraine is dependent on the transit of oil and gas rather than the price.”
Shemetilo also believes that Ukraine has distinctive EU accession potential when compared with the other CIS (Commonwealth of Independent States) members. they borrow for a five- to seven-year term. Thirdly, we established long-term relations with major investors. Relying on Rule 144A, we achieved a higher extent of transparency for investors; 50% of the issue was purchased by US investors that are very demanding as to the level of information disclosure.
As to the quality of allocation, 65% of the issue was purchased by asset management funds and 10% by insurance companies.
The fourth achievement was the decrease of the Eurobonds’ yields as a result of the improvement in the economic performance of Ukraine and favourable international conditions.
What do the recent bond’s terms and pricing tell us about the improvement in investor appetite for Ukrainian credit risk over the past year? First of all, at meetings with investors they demonstrated good knowledge of the economy of Ukraine. In addition, the achieved yield level of 6.875% a year is the lowest in the history of Ukraine. The interpolated spread to benchmark five-year and 10-year bonds of the US Treasury amounted to 335 basis points. (In comparison, the issue spread of the $800 million launch in June 2003 amounted to 433bp, and the $200 million tap in October 2003 was 362bp.) Such spread reduction proves the increase of investors’ trust in Ukrainian securities.
On November 27 2002 the tap issue of the notes of external state borrowing due 2007 had a cost to Ukraine at the level of 10.8% per year (securities to the nominal amount of $260 million were placed). The November 17 2002 tap issue of 2000 notes of external state borrowing in the amount of $139 million cost 9.75%. Thus, the notes issued in 2004 have a far lower yield.
What next on the borrowing front? In making decisions on future borrowings, the ministry of finance will be guided by both our own needs and market conditions. The important target is a gradual decrease of Eurobonds’ yield and sovereign rating increase.
How important is it to develop the domestic bond market? Internal market development is extremely important. The main goal of the ministry of finance is to make internal securities an attractive and liquid instrument. This year the ministry focuses on the sale of the notes of internal state borrowing (T-bills) with a one-year or greater maturity term. To date, there is no need in short-term resources due to high liquidity of the treasury account.
A key task is implementing the system of primary dealers. The ministry of finance is holding permanent discussions with major banks which may be interested in obtaining primary dealer status.
A third important development is the pension reform now under way, whereby non-state pension funds will be created. Together with banks, they will be key players in the internal securities market.
This year another instrument to stimulate the internal borrowing market became available when the notes for repayment of VAT reimbursement arrears were issued to the amount of Hrn1.9 billion ($356 million). These notes have a five-year maturity term, amortizing repayment scheme (20% annually) and yield equal to 120% of the National Bank of Ukraine’s discount rate. To date, the yield amounts to 8.4%.
One of the main government tasks in the period of high economic growth rates is not to divert the banking system’s funds to the budgetary needs but allow them to work for the economy. Only last year the growth of the amount of loans provided by the banking sector to the economy amounted to 62%, whereas in 2002 this figure reached almost 50%.
