You're reading: Ukraine borrows $1 billion under U.S. guarantees

Ukraine starts offering $1 billion in eurobonds on the external market with a record-low interest rate of 2.9 percent since the 5-year debt securities are guaranteed by the U.S. government, a first for the cash-strapped country. 

On May 8
the Cabinet of Ministers passed a decree regulating the eurobond issue. It is virtually
risk-free because no one expects the U.S. will not be able to cover principal
and interest payments.

Last year,
Ukraine raised $1.25 billion through 10-year, 7.5 percent interest eurobonds.
Their current yield is at 10.22 percent. The nation’s 5-year dollar-denominated
debt securities that currently traded could bring as much as 15.5 percent of
return to their holders, while their face value of $500 million will be repaid
in 2015.

However,
the current eurobond issue will not let investors to earn that much.

But
because Ukraine must repay $1 billion in eurobonds maturing on June 4, the new
bond issuance is viewed as refinancing older debts.

“Ukraine’s
new issue of debt securities will be interesting for investors who buy
high-quality assets with the U.S.-level risk rate,” says Sergiy Fursa, fixed
income sales for Dragon Capital investment house in Kyiv.

The yield
on the analogous 5-year American treasuries reached 1.62 percent on May 13.
Thus, the Ukrainian U.S.-backed eurobonds will be a good option for those who
are searching safe parking space for their capital, providing almost 1.3
percent more return.

U.S. debt
securities play a benchmark role for the whole market of risk-free investment
options.

The U.S.-based $190
billion global bond group Franklin Templeton Foundation, which currently holds
$7.5 billion of Ukraine’s debt, would not be interested in purchasing the
latest issue of Ukrainian eurobonds, says Fursa. “That is not what they’re
looking for,” he says. The Fund wants a higher return on each dollar invested,
while 2.9 percent seems to be a small reward for the 5-year money placement.

Dragon Capital’s Fursa
does not think that the U.S. will be providing further guarantees for Ukrainian
debt, which stood at $67.4 billion in March. He also doesn’t think the latest
bond issue will have a substantial impact on Ukraine’s other government
securities that are traded on the market. “Connection between them is very weak,” Fursa comments. U.S.-backed bonds yield-to-maturity rate will rather reflect America’s financial condition, than Ukraine’s.

The International
Monetary Fund’s managing director Christine Lagarde on May 12 said that Ukraine
needs more than the $17 billion that the international lender approved. That
means new options for raising capital may lie ahead for Ukraine, which is currently
suffering from Russia-rooted separatism.

Kyiv
Post associate business editor Ivan Verstyuk can be reached at
[email protected].