Emerging market investors hungry for yield pick-up are likely to find plenty of opportunities in Ukraine over the coming year as local companies take advantage of relatively stable political conditions to access the Eurobond markets in increasing numbers.
Debt bankers say corporate issuance could double from the $2.5 billion raised in 2010 following Viktor Yanukovichs decisive victory in presidential elections in February. Not only are last years successful borrowers state export bank Ukreximbank, Privatbank, fuel and energy supplier Dtek and its sister mining company Metinvest, and poultry producer MHP likely to return to the market, but a handful of new names are being tipped to join them.
Indeed, iron-ore producer Ferrexpo, Mriya Agro Holding and fellow agricultural company Kernel Holding were all due to issue debut bonds before the end of 2010 but were deterred by the negative reception of egg producer Avangards inaugural $200 million issue at the end of October. That shook investor confidence but analysts insist it was a one-off blaming variously poor execution, the companys single rating and the eurozone sovereign debt crisis and that the effects will not be lasting.
"There are very few corporates in Ukraine that could issue more than $500 million, so were still going to see a lot of deals in the $250 million to $500 million range"
Mike Elliff, RBS
"Unfortunately the Avangard deal has slightly contaminated the rest of the sector but I believe that better-rated Ukrainian corporates will be able to access the market successfully in 2011," says Mike Elliff, head of CEEMEA debt capital markets, commodity and export finance at RBS.
All three delayed deals are expected to resurface early this year, while other possible entrants are likely to come from the same sectors as existing issuers financial, energy, metals and mining, and agriculture. Elliff suggests that some of this years debutantes could come from the clutch of companies that either have or are planning international listings, such as agricultural firms Astarta, Agroton and Milkiland, and oil and gas producer Geo Alliance.
On the supply side, the drivers of issuance are clear. The Eurobond market offers Ukrainian corporates a chance to achieve longer-term funding than is available through either the domestic banks, which are still reeling from the financial crisis, or their international counterparts, which are reluctant to extend syndicated loans to single-B issuers.
For investors, it is simply a case of finding appropriate deals the Avangard debacle tested the limits of buyer tolerance but analysts agree that the appetite is still there. "Most investors consider themselves underweight Ukraine and the corporate sector pays extremely well so theres still a huge amount of interest coming out of the US and London-based funds," says Elliff.
He adds, however, that deal size is likely to remain limited. "There are very few corporates in Ukraine that could issue more than $500 million, so were still going to see a lot of deals in the $250 million to $500 million range. Investors will just have to live with the fact that these deals are at the less liquid end of the emerging market bond spectrum."
If the Ukrainian story continues on its upward trajectory, it seems unlikely that a little illiquidity will be sufficient to outweigh the prospect of juicy yields for investors. Ukraines corporates will take heart from a successful $500 million, one-year transaction by the sovereign last month. The deal, priced to yield 6.7%, was partly launched to shore up the governments finances after plans to sell the state-owned Ukrtelecom were delayed. The money might also have been used to refinance a yen loan drawn from Credit Suisse. The Swiss bank was sole manager on the new bond.