Why Ukraine Matters More Than You Think (Or “Only Wimps Pay Their Debts”)

Why Ukraine Matters More Than You Think (Or “Only Wimps Pay Their Debts”)

Ukraine, we are told, is infamous for its colorful proverbs and as the title suggests Citi’s Matt King warns that emerging market (EM) bond investors may yet become familiar with more of them in coming weeks. Unfortunately Ukraine’s importance is greater than its economic or even geopolitical significance would suggest. Risk premia everywhere have been compressed by the prolonged force-feeding of central bank liquidity. EM in particular has benefited from enormous inflows. However, for developed market (DM), King believes even a serious deterioration in Ukraine still feels unlikely to really derail the serene march tighter we see in spreads – but even so, he warns there are some broader implications of the EM woes which investors would do well to be aware of as “drunkards know no danger”.

Via Citi’s Matt King,

The situation in Crimea drags on. For corporate bondholders we feel the risk has moved to focus on those issuers with upcoming coupon payments and debt maturities in Ukraine along with the threat of economic sanctions against Russia’s issuers. The scarcity of obtaining US Dollars domestically coupled with the devaluation of the Hryvnia is also a concern for upcoming US Dollar payments. Any significant further devaluation would certainly put financial strain on issuers.

Ukraine Financials have upcoming USD payments due

The liquid non-financials paper is not trading at distressed levels, yet. The crisis looks far from over and should Ukrainian corporate issuers restructure debt, we believe the Eurobond holders would not escape financial pain.

Best case scenario for Ukraine sovereign credit: already in the price?

While the government’s recent discussions with the IMF delegation do give us some assurance that Ukraine would be able to strike a funding deal and roll over its short term FX debt, we do not see terrific value in being long at these levels; we find that the bonds are hardly priced for distress, with the implied probability of default on the CDS less than other high yielding names like Argentina and Venezuela. The upcoming Crimea referendum also has the potential to further inflame political tensions, and we prefer to stay side-lined until we get more signs of the situation normalizing.

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