FIXED INCOME RESEARCH February 15 – 21, 2017

Weekly Digest

. Ukraine is almost ready to sign the next IMF memorandum . ’s Yenakiieve Steel and Krasnodon Coal have halted operations

. MHP has sold its assets in Crimea . Privatbank has officially informed noteholders that it is no longer liable to repay its 2018 Eurobond issues totalling $375mln

Ukraine is almost ready to sign the next IMF memorandum, according to the country’s authorities PM Groysman and Minister of Finance Danyliuk. The local media has reported that since the initial leak in January the agreement has been somewhat altered, though key reform benchmarks have remained in place: overhauling the pension system, starting up the agricultural land market, establishing anti-corruption courts, and privatizing large SOEs (including the Odessa Port Side Plant, , and Turboatom).

Our view: We now expect the next $1bln disbursement to arrive in the beginning of March. Taking into account the magnitude of required reforms, we believe substantial delays in reception of the fifth tranche to be very likely. Our current 2017 EOP reserves forecast stands at $19.7bln. Metinvest’s Yenakiieve Steel and Krasnodon Coal have halted Metinvest bond price performance, % of par operations. According to the press release, production has been 99 disrupted by the ongoing armed hostilities and a blockade of railway 98 transportation between Ukraine and the uncontrolled territory in the 97 southeast. 96 95 94 Our view: With Ukrainian protestors currently blocking all shipments to 93 and from rebel territory (including iron ore supplies and steel designated 92 for export) it is essentially impossible for Yenakiieve Steel to run 91 (responsible for c. 20% of Metinvest’s 2016 hot metal output). The same 90 89 logic goes for Krasnodon Coal, which produces coking coal for the 13-Dec 27-Dec 10-Jan 24-Jan 7-Feb 21-Feb coke plant (located just outside of the current border). We estimate that the interruption will cost the company some $20-25mln per METINV 17 METINV 18 month in EBITDA (10-15% of the consolidated figure), which, together Source: Bloomberg with unpredictability with regard to duration, is substantial enough to warrant a recommendation revision on the issuer’s bonds. We downgrade Metinvest 2017-18 to Sell.

MHP has sold its assets in Crimea. According to the press release, the company’s subsidiary Raftan Holding Limited has disposed of its entire shareholding in Druzhba Narodiv Nova (chicken farm), Druzhba Narodiv (cattle breeding and plant cultivation), and the Crimea Fruit Company. While the total consideration was not disclosed, the company believes it to be equal to the fair market value.

Our view: We estimate the consolidated EBITDA contribution from the three subsidiaries at no more than $10mln (c. 2.5% of the company’s expected total in 2016), which means that the transaction is essentially inconsequential for MHP’s credit metrics, even if the assets were sold at a steep discount to their original value.

Konstantin Fastovets [email protected]

February 21, 2017 Ukraine Fixed Income Weekly Digest Privatbank has officially informed noteholders that it is no longer liable to repay its 2018 Eurobond issues totalling $375mln. The announcement has arrived in form of a letter that the bank has sent out to its trustee Deutsche Trustee Company Limited (forwarded to creditors by the LPN issuer UK SPV Credit Finance PLC). According to the provided information, the obligations have been bailed in by the DGF during the bank’s nationalization in December.

Our view: The letter clarifies Privatbank’s position with regard to its current talks with noteholders, who are threatening to go to court if the entire loan amount is indeed written down. Taking into consideration that Eurobonds are unsecured by nature and that the issuer has essentially entered bankruptcy (the state has already injected c. $4.5bln into its capital), we believe that legal enforcement of repayment will be very difficult. Privatbank’s notes currently trade at 29% of par and we only expect the price to deteriorate and retain our Sell recommendation.

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February 21, 2017 Ukraine Fixed Income Weekly Digest Appendix

Banking system 6m liquidity (lhs, UAHmln) vs NBU CD rates (%) Local market yield curve: yield (lhs, %) and maturity (rhs, days) 120,000 20 18.0 110,000 19 100,000 17.0 90,000 18 16.0 80,000 17 70,000 16 15.0 60,000 50,000 15 14.0 40,000 14 13.0 30,000 13 20,000 12.0 10,000 12 0 11 11.0 23-Sep 23-Oct 22-Nov 22-Dec 21-Jan 20-Feb 0 80 160 240 320 400 480 560 Accounts at NBU NBU CDs + Intraday NBU CDs Minfin UAH bonds UIRD KievPrime Reserve requirements NBU o/n rate NBU 14d CD rate

Source: NBU, Adamant Capital estimates Source: NBU, Bloomberg, Adamant Capital estimates

Local market liquidity (as measured by the aggregate amount of NBU correspondent accounts, investment CDs, and other intraday changes) has decreased by UAH7.6bln to UAH99bln over the last week.

The UAH/USD interbank rate strengthen over the week, starting out with 27.16 and closing at 27.02 (a 0.5% revaluation).

Government 12m FX debt(1) repayment schedule, $bln Government 12m local debt repayment schedule

0.7 25.0

0.6 20.0 0.5

0.4 15.0

0.3 10.0 0.2 5.0 0.1

0.0 0.0 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18

IMF Local FX bonds Quasi-Sovereign bonds Foreign FX Bonds Local UAH bonds, UAHbln Local FX bonds, UAHbln

(1) Quasi-sovereign debt includes body and interest of state banks, Ukrzalizynytsya, and Note: UAH/$ exchange rate set at 27.5; EUR/USD exchange rate set at 1.07 municipal bonds Source: Bloomberg, Adamant Capital estimates Source: Ministry of Finance

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February 21, 2017 Ukraine Fixed Income Weekly Digest

FX interbank trade volume (lhs) and FX rate (rhs), past 12 months Eurobonds: yield (lhs, %) vs duration (years) 14.0 500 28.0 DTEKUA 24 450 27.0 13.0 12.0 400 26.0 FUIB 18 350 25.0 11.0 EXIMUK 25 300 24.0 10.0 FXPO 19 9.0 250 23.0 METINV 17 OSCHAD 25 200 22.0 8.0 Ukraine 2023 Ukraine 2027

150 21.0 7.0 Ukraine 2019

100 20.0 6.0 Feb-16 May-16 Aug-16 Nov-16 Feb-17 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 Trade volumes, $mln UAH/USD exchange rate Corporate Eurobonds Government Eurobonds

Note: Exchange rate figures are from official interbank data Source: NBU Source: Bloomberg, Adamant Capital estimates

Global commodity price indices, past 12 months Ukraine 24m trailing trade (lhs) and CA balance (rhs)

2.2 6.5 1.0 2.0 6.0 0.8 0.6 1.8 5.5 0.4 1.6 5.0 0.2 4.5 1.4 0.0 4.0 1.2 -0.2 3.5 1.0 -0.4 3.0 -0.6 0.8 2.5 -0.8 0.6 2.0 -1.0 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Steel Iron Ore Wheat WTI Brent Corn Current account, $bln Exports, $bln Imports, $bln

Source: Bloomberg, Adamant Capital estimates Source: NBU

Ukraine 12m trailing monthly export breakdown, $mln Ukraine 12m trailing monthly import breakdown, $mln

3,500 4,200

2,800 3,500

2,800 2,100 2,100 1,400 1,400

700 700

0 0 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Consumer goods Machinery Energy Metals Other Consumer goods Machinery Energy Chemicals Other

Source: NBU Source: NBU

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February 21, 2017 Ukraine Fixed Income Weekly Digest

Key macroeconomic indicators 2014 2015 1Q16 2Q16 3Q16 4Q16 2016E 2017E Real GDP growth, YoY -1.6% -9.9% 0.1% 1.3% 2.0% 4.7% 1.7% 3.5% Nominal GDP, UAHbln 1,567 1,979 453 532 665 685 2,335 2,755 Nominal GDP, $bln 132 90 18 21 26 26 91 100 GDP deflator growth YoY1, % 14.8% 40.2% 20.5% 15.2% 15.5% 12.3% 16.0% 14.0% Period average CPI YoY, % 12.1% 48.5% 31.3% 8.1% 8.1% 12.3% 14.9% 11.8% End of period CPI YoY,% 24.9% 43.3% 20.9% 6.9% 7.9% 12.4% 12.4% 8.5% Budget deficit, % of nominal GDP1,2,6 4.6% 2.5% -0.7% 2.6% 2.9% 2.9% 2.2% 3.2% Public sector broad deficit, % of GDP3 13.6% 6.4% 2.5% 2.6% 2.9% 22.1% 8.7% 3.4% Public debt as % of nominal GDP, UAH 51.8% 79.4% 56.2% 78.2% 79.6% 82.5% 82.5% 69.9% Public external debt as % of nominal GDP, $4 30.7% 47.8% 50.0% 49.4% 51.4% 50.0% 50.8% 45.5% Total external debt, $bln 137.1 118.7 117.4 115.0 116.0 na 130.0 133.0 Export of goods and services, $bln 68.5 47.8 9.8 11.3 11.7 13.1 45.9 48.2 Import of goods and services, $bln 73.8 49.5 11.1 11.4 13.6 14.7 51.5 51.5 Trade balance, $bln -5.3 -1.7 -1.3 -1.5 -1.9 -1.6 -5.6 -3.3 Current account, $bln -5.3 -0.2 -1.1 0.9 -1.7 -0.7 -3.4 0.1 Financial accounts, $bln5 9.1 -0.6 ‐0.3 ‐0.3 ‐2.2 -1.0 -4.6 -1.8 End of period NBU reserves, $bln 7.5 13.3 12.7 14.0 15.6 15.5 15.5 19.7 Average interbank exchange rate, UAH/$7 11.9 21.9 25.8 25.2 25.4 25.9 25.6 27.5

(1) Quarterly figures use 12m trailing data (2) Excludes any deficit not included in the official figure, but includes net budget loans given to state enterprises (3) Estimated figures. Includes such below the line budget expenditures as recapitalization of Naftogaz and state banks, state guarantees given, etc (4) GDP calculated in $ according to the average UAH/$ exchange rate for the year (5) As per 6th edition of the IMF’s Balance of payments and international investment position manual (6) Proceeds from 3G implementation are excluded from 2015 consolidated budget revenues, as per IMF standards (7) Based on official NBU data of average monthly interbank rates. Not weighted by volume traded Source: NBU, SSSU, Minfin, IMF, Adamant Capital estimates

Indicative Eurobond prices, yields, and recommendations Bond name Recommendation Coupon Maturity Bid Yield Bid Price 1 week Δ Dur. yrs Out. $mln Currency Ukraine 2019 Hold 7.8 Sep-19 7.6 100.4 -0.1 2.3 1,743 USD Ukraine 2023 Hold 7.8 Sep-23 8.4 96.8 -0.5 5.1 1,355 USD Ukraine 2027 Hold 7.8 Sep-27 8.6 94.5 -1.1 7.1 1,307 USD MHP 2020 Hold 8.3 Apr-20 7.9 101.0 0.2 2.8 750 USD DTEK 2024 Buy 10.8 Dec-24 13.0 88.5 -2.3 5.8 1,275 USD Ferrexpo 2019 Hold 10.4 Apr-19 8.8 103.0 -0.4 1.6 160 USD Metinvest 2016 Sell 10.3 May-16 nm 96.4 -0.1 nm 89 USD Metinvest 2017 Sell 10.5 Nov-17 nm 96.8 -0.3 nm 304 USD Metinvest 2018 Sell 8.8 Feb-18 nm 96.3 0.0 nm 795 USD Ukrlandfarming 2018 Sell 10.9 Mar-18 175.1 29.7 0.0 1.0 521 USD Avangard 2018 Sell 10.0 Oct-18 104.2 30.7 0.0 1.6 213 USD FUIB 2018 Hold 11.0 Dec-18 11.0 99.9 0.2 1.3 197 USD Privatbank 2018 (10.250) Sell 10.3 Jan-18 222.6 28.6 -1.1 0.8 160 USD Privatbank 2018 (10.875) Sell 10.9 Feb-21 196.2 29.1 0.1 0.9 175 USD Oschadbank 2023 Buy 9.4 Mar-23 9.5 99.5 0.0 2.6 700 USD Oschadbank 2025 Buy 9.6 Mar-25 9.9 98.2 0.0 3.6 500 USD Ukreximbank 2022 Buy 9.6 Apr-22 9.6 100.1 0.1 2.7 750 USD Ukreximbank 2025 Buy 9.8 Jan-25 10.1 98.3 -0.1 3.9 600 USD Ukrainian Railway 2021 Hold 9.9 Sep-21 10.4 98.2 0.0 2.5 500 USD Mriya 2018 Sell 9.5 Apr-18 nm 5.8 0.0 1.2 400 USD Kernel 2020 na 8.8 Jan-22 8.0 103.0 0.2 4.1 500 USD

Note: data as of February 21, 2017 Source: Bloomberg

Fixed Income 2 week event calendar Event Type Date SSSU - Industrial production monthly data Exact 23-Feb Metinvest - Monthly report for December Indicative 28-Feb Kernel - H1 FY 2017 Financial report Exact 28-Feb NBU - Balance of payments monthly data Indicative 2-Mar NBU - International reserves monthly data Indicative 7-Mar

Source: NBU, SSSU, Adamant Capital estimates, company data

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February 21, 2017 Ukraine Fixed Income Weekly Digest Contacts

Adamant Capital 5-B Volodymyrska Street, 2nd floor 01001 Kyiv, Ukraine +380 44 585 52 36

Portfolio Management Konstantin Viushynskyi | [email protected] Yuriy Sozinov | [email protected]

Research Konstantin Fastovets | [email protected] Valeria Vasylchuk | [email protected]

PR Inna Zvyagintseva | [email protected]

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