London - Ukrainian companies' dollar bonds are lower than they've been for months on fears the country's worsening economy, armed rebellion and dispute with Russia will send more of them the way of agro firm Mriya, which has hinted at a debt restructuring.
Mriya's bonds due 2016 and 2018 have halved in value since it told creditors last week that high raw materials prices, weak sales and difficulty obtaining working capital were forcing it to “take steps to restore its financial viability”.
Investors have taken this as portending a restructuring of the bonds, which are trading at 45-50 cents in the dollar, reflecting what creditors now expect to receive on each dollar invested.
They fear Mriya could be only the first of many.
A prolonged recession and pro-Russian insurgency in eastern Ukraine have slashed corporate revenues, while this year's 50 percent depreciation in its hryvnia currency has raised debt servicing costs.
Sales to Russia, its biggest trading partner, have collapsed.
Richard Segal, emerging markets strategist at Jefferies in London, believes many companies will resist restructuring as long as possible, but that politics and economics made “defaults on the basis of distressed exchanges are likely”.
Those risks were now just about completely reflected in bond prices, he said.
The tumble in prices has been across the board, not even sparing firms such as metals exporters Ferrexpo and Metinvest that have dollar revenues. Metinvest's 2015 bond is near 2-1/2 year lows, down 10 cents this month, despite the chief executive's assurance that restructuring is not being considered.
Likewise, a 2015 dollar bond from chicken farmer MHP
has fallen 5 cents in August to three-month lows around 96.5 cents, while power firm DTEK's 2015 and 2018 bonds have both lost 5 cents this month after Fitch cut the company's credit rating.
In its note, Fitch cited elevated refinancing risk as DTEK must repay $1.2 billion (R13 billion) in debt in 2014-2015.
There are signs of trouble on loan markets, too, with media reports suggesting a steel producer based in eastern Ukraine had asked lenders to postpone payments on a $500 million credit.
“If this situation continues we may see more corporates coming out to say they are facing difficulties. Most bonds are pricing some kind of restructuring, but I think we haven't seen the bottom yet,” said Andre Andrijanovs, a strategist at Exotix.
HEAVY DEBT SCHEDULE
There are many problems, the foremost being the repayment schedule.
Companies have external financing needs of $15.4 billion this year, the International Monetary fund says, a figure almost on a par with Ukraine's hard currency reserves.
So cash-strapped firms have no chance of central bank aid.
The central bank estimates the private sector has around $100 billion in external debt, with $11 billion in Eurobonds, and hard-to-track loans and export credits comprising the rest.
Much of this, taken out during the emerging corporate debt boom years of 2010-2013, is starting to mature.
Companies and banks will need to find $11.3 billion next year, the IMF says.
Second, companies' ability to raise cash is hemmed in by the sovereign's CCC credit rating - eight notches into 'junk' - and expectations of a 6 percent economic contraction this year.
Third, many firms have assets and revenues in the violence-hit Donetsk and Luhansk regions, or in the Crimea, which was annexed by Russia in March. And Russia - a key source of investment and trade - has slapped a ban on Ukrainian goods.
MHP exemplifies the difficulties companies face.
It said this month that fighting in eastern Ukraine had forced it to shut a farm that accounts for a third of its egg-hatching capacity.
Sales to Russia and its customs union partner Kazakhstan - a healthy 20,000 tonnes in April-June 2014 - are now zero.
Similarly, DTEK produces 60 percent of its coal in the Donbass region, while a third of borrowings come from Russian banks, Exotix data shows. Two-thirds of Metinvest's sales are from subsidiaries in the Donbass and almost a tenth of its exports went to Russia last year, the data shows.
“Disruption of DTEK's operations in these areas ... is likely to have a material adverse impact on its credit metrics,” Fitch said.
All the same, value may lurk in some beaten-down issues, says Jefferies' Segal. For instance, a 300 bps rise since June on Ferrexpo 2016 bond yield seems unjustified because its cash position well exceeds the $500 million bond, he says.
And Max Wolman, a fund manager at Aberdeen Asset Management, is holding on to MHP bonds - which pay a 10.25 percent coupon - reckoning on rising exports to Asia and the European Union.
“In 2008 when these credits were under serious pressure MHP stayed current on debt repayments,” Wolman said of the post-Lehman crisis when state oil firm Naftogaz defaulted.
“We think there is willingness to pay (at MHP), and ability is there, too.” - Reuters