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.
