Ukraine: one year on but no end in sight
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Ukraine: one year on but no end in sight

  • After 12 months of fighting further action is needed from the west to prevent a balance-of-payments crisis and to support the reconstruction costs faced by Ukraine
  • With valuations trading close to the lows, what might a suite of restructured Eurobonds look like?
  • Ukraine’s Eurobonds offer neither a clear asymmetry in the future return profile or a sufficient margin of error for upside assumptions to be wrong. Failing these criteria for investing in non-performing distressed credit, we find it hard to turn more constructive on the bonds

A year on from Russia’s invasion of Ukraine we are unfortunately no closer to seeing an end to the war than when the first bombs dropped on 24 February 2022.  In the meantime, the Ukrainian economy has collapsed by a third, 20% of the population has left the country and immeasurable damage has been done to physical and human capital. While the west has stepped up to provide financial support, more will be required to prevent a full-blown balance of payments crisis: IMF estimates for 2023 external financing needs are as high as $57 billion2. Pressures on the currency persist and the central bank continues to lose an average of $500 million per week3 via FX interventions to support the new currency peg following the 20% devaluation last July. Given these uncertainties it is no mystery why Ukraine’s Eurobonds have materially lagged the rally in emerging market (EM) distressed debt since October.

Figure 1: total return of EMBIG Ukraine versus Global Credit C Index

Figure 1 - total return of EMBIG Ukraine versus Global Credit C Index

Source: JP Morgan, February 2023

We have supported Ukraine’s efforts to defer Eurobond debt service in the best interest of all stakeholders to ameliorate near-term economic damage and maximise future growth and recovery values4. The current standstill will expire in August 2024, prior to which sovereign bondholders will need to either extend the standstill or conclude a more sustainable debt restructuring. While bonds are already pricing in deep haircuts and deferrals, the lack of visibility around the duration of the war means further downside cannot be ruled out.

When we consider investing in distressed EM credit we try to answer two main questions: what is the upside/downside? And do current valuations offer a large enough cushion for us to be wrong in our assumptions about recovery values? Unlike in most sovereign restructuring cases there are massive uncertainties, including – at the extreme – whether the issuer will even exist as a sovereign entity in the medium term. Therefore, estimating the amount of debt Ukraine can reasonably afford to service and what a suite of restructured Eurobonds looks like is subject to multiple possibilities. 

In a positive outcome we think recovery values could be around $305; in a downside scenario the recovery value could be closer to those realised in the post-war Iraq restructuring, at around $10. In an extreme downside scenario the bonds could ultimately recover nothing for many years. Hence, at current prices in the high-teens/low-20s we see risks as largely symmetric. With valuations not pricing in a deeper margin of error and possessing no discernible edge in how the war will play out, we find it hard to take a more constructive view on adding to current holdings in Ukrainian Eurobonds.
Nevertheless, we will continue to support Ukraine’s efforts in negotiating for a sustainable long-term debt service profile. We also encourage multilaterals, bilaterals and investors to explore more innovative solutions – whether in the form of bond guarantees; creative use of IMF special drawing rights (SDRs), which are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund; or a modern-day Brady Plan. With enormous reconstruction costs estimated at up to $1 trillion6, the private sector will need to be offered incentives such as a realistic EU accession path and assurances provided by an IMF policy anchor to restore market access and mobilise the full amount of financing required in coming years.
6 March 2023
Bowers Gordon
Gordon Bowers
Research Analyst, Emerging Markets Fixed Income
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Ukraine: one year on but no end in sight

1https://www.unhcr.org/ukraine-emergency.html

2Reuters, IMF approves Ukraine monitoring program to help spur donor financing, 20 December 2022

3Reuters, World Bank disburses additional $500 mln to Ukraine, 25 October 2022

4Columbia Threadneedle Investments, Standstill on Ukraine debt is right for both the country and our clients, August 2022

5Columbia Threadneedle Investments analysis, February 2023

6https://www.president.gov.ua/en/news/ukrayina-stane-vzircem-vidbudovi-prezident-zvernuvsya-do-gen-79513

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For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority..

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important information

Important Information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority..

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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