Ukraine Leads Distressed Debt Rally as Poroshenko Election

May 30, 2014 12:12 am ET

(Updates with credit analyst recommendation on Ukraine bonds in seventh paragraph.)

May 30 (Bloomberg) -- Ukrainian corporate bonds helped lead the longest distressed-debt rally in more than a year among emerging markets as investors bet billionaire President-elect Petro Poroshenko will ease political tensions with Russia.

Notes sold by the eastern European nation’s riskiest companies rose 8.7 percent this month through yesterday, according to Bank of America Merrill Lynch’s Distressed Emerging Markets Corporate Plus Index. The measure’s 3.4 percent gain capped a four-month, 12.5 percent, winning streak, the longest since the period ended February 2013.

‘Chocolate King’ Poroshenko, 48, pledged to visit eastern regions to end fighting with separatists, after Russia annexed the Black Sea peninsula of Crimea in March. The International Monetary Fund has meted out $3.2 billion in aid as part of a $17 billion loan to help Ukraine pay its debt, as the nation had its rating cut to nine levels below investment grade by Moody’s Investors Service.

“The Poroshenko election, won in one swift round, has been the wished-for surprise that cheered the business sector,” Vladimir Miklashevsky, a strategist at Danske Bank A/S in Copenhagen, said by phone May 28. “The IMF aid also showed there’s real money to support the country.”

Top Performer

The top performer among distressed debt in Ukraine was State Savings Bank of Ukraine JSC’s $700 million of 8.25 percent notes, which returned 14.2 percent, according to data compiled by Bloomberg. State Export-Import Bank of Ukraine JSC’s 8.75 percent bonds jumped 14.4 percent. Both are rated Caa3 by Moody’s, nine levels below investment grade.

“Investors have realized that the election has gone on successfully, that Western sanctions against Russia are not going to continue, and that served as the catalyst for the market,” Stan Manoukian, founder of Independent Credit Research LLC, said in an interview from California on May 28. “Ukraine’s obligations will be well-supported by Western institutions like the IMF. I’m confident they’re not going to default in the near future.”

Manoukian said he still recommends Ukrainian debt including bonds issued by State Savings Bank, Export-Import Bank and National JSC Naftogaz of Ukraine.

The next-best performers were distressed debt of Russian companies, which rose 7.4 percent, and Kazakhstan notes, which gained 6.9 percent, the Bank of America Merrill Lynch indexes show. Vladivostok-based Far Eastern Shipping Co.’s 8 percent notes due 2018 advanced 18.6 percent.

Russian President Vladimir Putin said before the May 25 vote that he was ready to work with Ukraine’s new president, acting to assuage concerns that the tensions might signal the start of a ‘New Cold War.’

Ukraine stepped up air patrols over the eastern city of Donetsk this week after clashes killed dozens of militants. Gains in the country’s bonds may be short-lived “because people appear to be under-estimating the geopolitical risk,” Danske Bank’s Miklashevsky said.

Bumi, China Forestry

Indonesian distressed bonds were the biggest losers in May, tumbling 6 percent, the Bank of America Merrill Lynch indexes showed, as coal producer PT Bumi Resources plunged.

The Jakarta-based company’s $700 million of 10.75 percent debentures due 2017 fell 8.4 percent since April 30, according to Bloomberg-compiled prices, capping a 30.2 percent slump this year as the company sought more time to service its debt.

“They’re having issues with payments,” said Amit Jain, a credit analyst in Bangalore at SJS Markets Ltd. “We think there’s a need for the company to restructure because they can’t sustain the current debt load.”

China Forestry Holdings Co. led losses among Chinese distressed debt, down 0.5 percent overall in May, as the timber producer’s 10.25 percent notes due 2015 lost 1.7 percent, based on Bloomberg-compiled data.

The Beijing-based company extended an offer to buy back the bonds for a sixth time, to June 24. The company in November offered 42.5 cents on the dollar to bondholders. It had received tenders amounting to $100.6 million, or about 64.8 percent of the notes’ face value, as of 5 p.m. in New York May 22, according to a May 23 company statement to the stock exchange.