Businesses are taking differing approaches to managing their debt, and as we approach the point where paused repayments will resume, markets are looking at the ability of companies to uphold them.
24.05.2024 | 06:31 Uhr
The ongoing conflict in Ukraine has forced companies to adapt,
and although each is taking a different approach, they are all so far
proving their resilience in challenging times. We have seen energy firm
Naftogaz1 battening down the hatches and focusing on
operations; steel and mining group Metinvest keeping investors very well
informed and making progress on environmental, social and governance
reporting; and food and agrotech company MHP powering ahead with capex
plans in readiness for potential EU integration. These different approaches also extend to how debt is being
managed in Ukraine, and while many have pushed back debt payments with
consent solicitations, others are utilising offshore cash reserves to
slowly prepay debt and avoid big future payouts. We are fast approaching the point where paused debt repayments
will resume and over the past few months we have seen a strong price
recovery for shorter-end corporate bonds as markets price in the ability
of companies to make those payments. The key question is which companies have the willingness and
ability to keep meeting payments in the longer term, assuming no
imminent end to the conflict? To answer this we need to look at what is
driving the improvement in pricing. The recent rally can be boiled down
to two key developments, which benefit each company differently: 1. Guidance that corporates will not be included in the
upcoming sovereign debt restructure, which increases the likelihood of
corporate bonds being serviced as planned. Naftogaz as a quasi-sovereign has benefitted the most from this. 2. The opening of a temporary deep-sea corridor route
protected by the Ukrainian military is allowing exports to resume from
the Odessa ports to the Middle East and North Africa (MENA). Foodstuff exporter Kernel and MHP stand to benefit most from this. Honing in on point 2, the promise of increasing exports and
lowering logistics costs is particularly exciting for Kernel, which has
had inventories trapped at ports for months; MHP, which is struggling to
get poultry products over Polish borders due to farmer strikes and
blockades; and Metinvest, which used to get most of its revenues from
iron ore exports to MENA via the shipping routes. However, this only really provides a short-term confidence boost,
and we must be mindful of strong headwinds in the form of FX
restrictions on local liquidity. These, coupled with the mandate to
bring export sale proceeds onshore, limit a company’s ability to pay
bondholders, even if cash levels appear healthy in a quarterly earnings
update. The companies with offshore operations are in the best position,
as they are able to amass more cash and build up reserves – albeit
slowly. It is precisely the uncertainty around how long offshore cash
will last that has led to shorter-end bonds performing better than
longer-end bonds. While longer-term uncertainty persists, an active management
approach suggests an opportunity to own some Ukrainian corporates in
preference to the sovereign at this juncture. Looking further ahead,
Ukrainian companies have proved themselves more resilient than expected.
Investors should pay close attention to their ability to remain so.
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