Last week Ukrainian markets were driven by global sentiment and sovereign Eurobonds lost 2-3 points on the back of negative headlines about Greek banks coming from the ECB. Five-year CDS spreads for Ukraine closed 64bp w-o-w wider at 855bp on Friday, up 6bp from the end-2011 level. The market grew quieter on Friday, capping the week’s sell-off. The long end of the sovereign curve came down by about 2.5 points w-o-w with Ukraine 20s and 21s finishing at 87.25/88.25 (10.04%/9.85%) and 87.5/88.5 (10.13%/9.94%). The market, preoccupied with global events, did not react to PM Azarov’s announcement that agreement has been reached on the $2bn VTB loan (see below). On the corporate side we saw selling pressure in Oschadbank, which slipped by more than 3 points w-o-w to 84.0/86.0 (13.8%/13.03%). Corporates were also better offered, but not much was traded on low levels. Strong 1Q12 financials didn’t help MHP as its bonds were re-priced around 2 points lower to 93.5/95.5 (12.98%/12.11%). Bonds are off to a better start at the beginning of this week, signaling some rebound.

We recommend buying DTEK 15s which are trading with an attractive 206bp spread to the sovereign curve (11.3% YTM). The company recently reported strong 2011 financials and is set to benefit from a recent privatization spree during which it acquired stakes in two generating companies, one integrated electricity and heating utility and three electricity distributing companies, accumulating controlling stakes in all six assets. DTEK also gained control over the two most prized state coal mines and purchased a controlling stake in another mine.

Ukraine’s 5-year CDS spreads closed 26bp w-o-w wider at 791bp last week (-58pp YTD), in line with CEE credits’ dynamics (CDS for Hungary, Bulgaria, Romania and Poland widened by 23bp w-o-w on average). As a result, Ukraine’s sovereign curve moved up by 30bp (mainly on the long end), with Eurobond prices declining by 1-2pt on small volumes (though a slightly improved mood at the end of the week provided for some recovery, pushing quotes up by 0.25-0.5pt). Ukraine 20s and 21s thus finished the week at 89.5/90.5 (9.6%/9.4%) and 90.25/91.25 (9.9%/9.4%). Positive news on the extension of a $2bn VTB loan maturing in June, announced by an NBU representative (though with no additional details yet), and growth in NBU reserves in April did not affect the market, which was mainly driven by global sentiment. Among corporate names, we saw buying interest in DTEK 15s, which dipped by only 0.25pt w-o-w to 96.25/97.25 (10.9%/10.5%).

Last week was quite sluggish for Ukrainian Eurobonds but they continued to enjoy investor demand supported by positive performance of the whole CEEMEA universe on the back of fresh inflows into EM debt funds and strong Ukraine-specific technicals – as quite a few market players remain underweight or short, there is not much debt on offer to threaten the recent rally. Thus by Friday, Ukraine 20s and 21s increased by 1.25-1.5pt to 91.25/92.25 (9.3%/9.1%) and 92.25/93.25 (9.3%/9.1%), respectively.

Ukrainian Eurobonds experienced a volatile week under pressure from negative mood swings in global markets, but sovereigns still managed to close higher w-o-w. Ukraine 21s rose by 1.5pt w-o-w to 89.5/90.5 (9.60%/9.41%) while quasi-sovereign Naftogaz added 1.0pt to 97.5/98.5 (10.69%/10.21%). City of Kyiv bonds enjoyed a strong price rise: Kyiv 16s and Kyiv 15s rose by 1.8-2.0pt in just one day and were quoted at 85.5/87.5 (13.27%/12.48%) and 86.0/88.0 (13.86%/13.17%), respectively at the end of the week. Metinvest’s good 2011 results had little impact on the market, with most investors maintaining a conservative outlook for metallurgical companies. Metinvest
15s were quoted at 99.0/100.5 (10.63%/10.05%) and Metinvest 18s at 92.0/93.5 (10.63%/10.26%). In addition, Oschadbank’s 2011 IFRS results showed rather good performance including a decline in exposure to Naftogaz from 51% to 35% of total loan book; on the week Oschadbank 16s rose by 1.5pt to 87.5/89.5 (12.40%/11.69%).

State-owned Oschadbank, the third largest bank in Ukraine with a 7% share of total assets, reported 2011 IFRS net profit of $137m, up an impressive 138% y-o-y. As a result, ROA improved to 1.7% from 0.8% in 2010 and ROE rose to 6.5% from 2.9% (a rather good result given the bank’s high capital adequacy ratio of 30% as of end-2011). Net interest income increased by 11% y-o-y to $578m while NIM was slightly down by 0.3pp y-o-y but still solid at 7.6% (above the sector avg. of 5.9%). On the back of a 29% rise in administrative costs the bank’s Cost/Income ratio increased by 5.9pp y-o-y to 44.1%, but remained better than the sector average of 64% and especially good if one accounts for Oschadbank’s extensive retail network of over 5,800 branches and outlets (the largest network among Ukrainian banks). The growth of administrative expenses was driven by IT-related operating costs and marketing expenses. It should be noted that Oschadbank’s 2011 IFRS profit is double the earlier reported UAS net income figure of $67m due to lower loan loss provisioning expenses.

Ukrainian sovereign Eurobonds finished the week a touch higher, with benchmark Ukraine 20s and 21s closing at 88.8/89.8 (10.0%/9.8%) and 89.0/90.0 (10.0%/9.8%) respectively. Quasi-sovereign Naftogaz and Oschadbank lost 0.5-1pt w-o-w, to 97.0/98.0 (11.2%/10.7%) and 87.0/88.0 (12.8%/12.5%) respectively. Corporates were mostly weaker, though DTEK and MHP gained 0.25pt each to 95.8/96.8 (11.3%/10.9%) and 96.5/98.0 (11.9/11.2%) respectively. This week started on a firmer note, supported by positive NBU reserve dynamics in April (net growth of 1.1% in the first two weeks), but further direction will largely depend on global developments.

Metinvest today released a strong set of 2011 results, which fell largely in line with management’s July 2011 forecast and became second best in the company’s history. Sales surged by 52% y-o-y to $14.2bn (above our forecast of $13.7bn and within the $13.5-15.0bn range guided by management), EBITDA rose by 40% to $3.57bn (vs. our forecast of $3.52bn and $3.5bn guidance) and net income jumped by 324% to $1.85bn (vs. our estimate of $1.89bn). The EBITDA margin stood at 25.1% (-2.1pp y-o-y) and the net margin totaled 13.1% (+8.4pp y-o-y) — the latter was depressed in 2010 due to goodwill impairment charges.

Despite negative sentiment prevailing globally last week, Ukraine’s sovereign curve was quite stable and closed slightly up w-o-w on the long end on Friday. Support was first provided by a presidential administration official’s constructive remarks on prospective household gas price hikes and plans for the government to issue ruble-denominated Eurobonds, and was reinforced by positive NBU reserve statistics for March and good fiscal indicators for 1Q12, which were viewed as enabling the government to service its external debt through September without Eurobond issuance (assuming $2bn VTB loan rollover in June)

Ukrainian Eurobonds were under selling pressure last week in the absence of country-specific negative news flow. With a risk-off mood dominating, both sovereigns and corporates hit lows at the end of the week. Ukraine 20s and 21s lost 3.5-4.0pt to 85.0/86.0 (10.46%/10.26%) and 85.5/86.5 (10.50%/10.30%). Corporates were also weak with sellers in names like DTEK, Metinvest and Mriya. Bottom fishers appearing at the end of the week were not aggressive enough to turn the market around. Only Avangard 15s stood firm and enjoyed buying support in the 82.0/84.0 (16.91%/16.05%) area.