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Payout uncertain – Risky Ukraine papers in high News

Sunday, August 20th, 2017 | Economy

A proof of one of the most opaque emerging country bonds is enough to prove that monetary policy incentives are leading some investors away from the mainstream markets: Ukrainian GDP warrants.
The papers, which are linked to the economic growth of the country home to the war, have increased by more than 50 percent since the end of March following an investor recommendation by JPMorgan Chase & Co.. Analysts of the bank say the rally is not over yet.
In this case, investors are prepared to take risks for the rare opportunity to have liabilities that are protected against the central bank policy of the industrialized countries and the development of commodity prices – the double threat that most high-yield bond markets have to deal with. In contrast to conventional bonds linked to interest rates, the disbursements of the GDP warrants depend on the economic growth of the issuer.
New appetite of investors
"Investors are, of course, looking for assets that have a valuation potential, and it is difficult to find that in the current investment climate," said Jonny Goulden, head of local emerging market bond analysis at JPMorgan in London. "We see new appetite of investors."
Due to low interest rates, many traders had recently left the area of ​​conventional bond markets in the search for returns. Argentina, for example, convinced investors in June to buy 100-year bonds. Iraq, a few days ago, increased the price of a eurobond in a volume of 1 billion dollars, after the emission was oversubscribed. Mongolia and Ethiopia are now among the dollar bond issuers in the ranks of emerging markets with the best development this year.
At the end of March, Goulden and his colleagues raised the appetite for the Ukrainian warrants with a 25-page report, which concluded that the disbursements – even if they were difficult to determine – would far exceed the current price. At that time the warrants were traded below 30 cents per dollar nominal value. Currently it is 46 cents. JPMorgan sees its fair value closer to the 80 cent mark.
Self-satisfaction and too much optimism
The warrants also have a seal of approval from Michael Hasenstab, Templeton Global Macro's investment manager. He has been sticking to the papers since he received them in 2015 as part of the debt restructuring of Ukraine, even if he screwed down the stocks of Eurobonds in the country. Franklin Templeton is by far the largest holdings of the papers, as data from Bloomberg show.
Analysts at Bank of America Merrill Lynch are less convinced. The rally of the warrants reflected "self-satisfaction in risks" and "too much optimism" on growth prospects in Ukraine, Gabriele Foa, a London-based analyst at the bank, said in an assessment at the end of July.
Payments to Ukraine from a $ 17.5 billion International Monetary Fund (IMF) rescue package were delayed because the country is progressing slowly in the reforms, while the struggle with separatists on the border with Russia continues the economy loaded.
Tied to growth
Investors holding the papers can receive a disbursement twice a year between 2021 and 2040, the amount being determined by the growth rate of the gross domestic product of the Ukraine. The country is, however, not obliged to make payments until the economic output has risen from $ 93.27 billion at the end of last year to $ 125.4 billion. Another condition is growth above three percent.
The IMF expects that the Ukrainian economy will tighten strongly enough to break the disbursement barrier in 2021.

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