Ukraine placed seven-year EUR-denominated Eurobonds at 6.75% interest. Is that expensive or not?

27.06.2019

Igor Mazepa, CEO of Concorde Capital, comments the placement of Ukraine’s seven-year EUR-denominated Eurobonds at 6.75% interest

On June 13, 2019 Ukraine's Finance Ministry successfully placed a seven-year EUR-denominated sovereign Eurobond (UKRAIN) at a 6.75% interest rate. According to the Report of the Ukraine's Finance Ministry, the total amount outstanding is EUR 1 bn. Is that expensive or not? Here are arguments for both.

From one hand, it’s inexpensive: since the 2014 crisis, this is the least expensive international market placement made by Ukrainian government.

From the other hand – quite expensive:

Debt is far less expensive in euros than in U.S. dollars.

• Ukraine's Finance Ministry recently placed one-year EUR-denominated notes at 4.60% interest, just as similar debt was at 7.25% interest.
• If we compare the rates of the most reliable securities in U.S. dollars (U.S. Treasury bonds) and euros (German state bonds) with maturity in 2026, then we have a difference in 2.5pp. The determining of the price of USD- and EUR-denominated international loans is oriented towards these very securities.
• Therefore, supposes Igor Mazepa, that theoretically Ukraine’s seven-year placement in euros should be 2.5pp less expensive than in U.S. dollars. If our USD-denominated bond with a 2026 maturity traded at an interest rate of 7.95%, then the EUR-denominated bond should be placed at 5.45% interest. But we have 6.75%.

But we have to take into consideration that:

Unfortunately, this difference in USD- and EUR-denominated borrowings is available to borrowers with higher ratings. Which means that the lower the credit rating of the country, the lower the difference – mentioned Igor Mazepa.

Let’s take a look at some differences between USD and EUR rates on six-and seven-year bonds:

• 2.5% difference for Poland, whose credit rating is А / А- (ten-eleven positions better than Ukraine)
• 2.2% for Gazprom, whose credit rating is ВВВ / ВВВ- (seven-eight positions better than Ukraine)
• 1.8% for Turkey, whose credit rating is ВВ / ВВ- (four positions better than Ukraine)
• 1.3% for Egypt, whose credit rating is B+ / В (two positions better than Ukraine)

So far 1.2% for Ukraine – and that looks to be a trend, - summarized Igor Mazepa, CEO of Concorde Capital investment company.