Some investment analysts and policy advisers criticized the Ukrainian government’s move to cover Naftogaz’s $1.67 billion eurobond obligation on Oct. 1. The payment was part of the state-owned energy giant’s $4.8 billion debt servicing schedule for the year.
Since the hryvnia is at its
weakest against the U.S. dollar, all payments in the American currency are
extremely expensive these days.
The eurobond settlement should
have been postponed – or “restructured” in financial jargon, said Viktor
Kryvenko, a policy advisor at the Finance Ministry and parliamentary candidate
with Samopomich, a party that is betting on a younger generation of
politicians.
The logic is, according to
Kryvenko, local demand for the dollar should be satisfied and the budget is in
a critical state.
“It may have been easier to
restructure,” said an Oct. 3 note to investors by the London branch of South
Africa’s Standard Bank. “Difficult choices had to be made in terms of spending
priorities – debt service over public spending and higher taxes on the energy
sector. The price has likely been deeper recession, and less energy security.”
Meanwhile, Oleksandr
Valchyshen, head of research at Investment Capital Ukraine, a major bond
trader, says restructuring would be “suicide”. Maintaining the confidence of
foreign institutional investors is more important for the Ukrainian government
than saving $1.67 billion.
Yuriy Korolchuk, an analyst at
Institute for Energy Strategies, says restructuring was simply not an option
because each side wouldn’t agree on the conditions. “This is why the
International Monetary Fund gave money, so the government could repay its
debt,” he emphasized.
Had investors even agreed to
reschedule the payment – they’d have to be provided with a much higher interest
rate compared to 9.5 percent that went with the eurobond’s issuance in 2009,
given the country’s current credit rating of CCC, which can be described as
“extremely speculative” or “default imminent.”
In August, the yield on this
particular security was above 30 percent which basically reflects how much
investors want to earn on a Ukrainian government-backed debt.
Initially Naftogaz borrowed
$500 million through a eurobond in 2004 and $1.1 billion through loans over the
next five years. Overall, $1.6 billion was due in 2009. But Ukraine didn’t have
the money, which is why then-Prime Minister Yulia Tymoshenko’s Cabinet decided
to issue another Naftogaz eurobond that year and promised investors to pay it
back in 2014.
This is also a part of another
story. Ukraine’s underdeveloped eurobond legislation obliges an issuer to place
as much as 75 percent of the bond on the illiquid domestic market for local
investors, whose appetite is critically low and borrowing even $100 million at
current market conditions is a mission close to impossible.
To bypass this legal norm,
Ukrainian companies borrow from the global market through subsidiaries
established in foreign jurisdictions, but Naftogaz is a state-run company and
this was not an easy option for it. As a result, Tymoshenko gave a special
order to the central bank to allow Naftogaz to issue a eurobond in 2009 without
placing any of it on the local market, basically circumventing legislation. She
decided to make an exception instead of changing the rules that just don’t
work.
Kyiv Post associate business
editor Ivan Verstyuk can be reached at [email protected].
