Ukraine’s Ministry of Finance has exercised its call option on an expensive $725mn Eurobond issued this August as bridge financing to get the government through its repayments schedule this autumn.

The ministry repaid the bond at a call price of 98.551% of par, the funclub.net Ukrainian news site reported on November 3.

The $725mn in discount notes were always a short-term measure and were, unusually, privately placed on August 27 at 95.551% of par. The notes were callable at 98.551% by November 28 and at par thereafter. Their final maturity was February 28, 2019, Concorde Capital reports.

The surprise issue was a stop gap measure as the government struggled to meet a demanding repayment schedule this autumn, where some $3bn of obligations came due but it was unclear if the government would be able to meet the redemptions. Ukraine’s $17.5bn Extended Fund Facility with the International Monetary Fund (IMF) has been de facto frozen and while the ministry has been actively issuing FX bonds on the domestic market, demand for its bonds was drying up. Forced to start tapping the country’s hard currency reserves, those fell below the three-months future import cover economists believe is necessary to maintain the stability of the national currency and the hryvnia has slipped in value against the dollar as a result.

However, the pressure has now eased somewhat. The IMF announced a new deal in October, downgrading Ukraine from an EFF to a shorter term and more stringent Stand By Agreement worth $3.5bn, but that allowed the government to issue a $2bn Eurobond at the end of October on better terms that takes care of all its debt obligations until the end of the first half of next year. Ukraine placed a $750mn five-year tranche of sovereign Eurobonds, and a ten-year tranche of $1.25bn at rates of 9.0% and 9.75%, respectively, at a snap offering on October 25 that followed on the back of the new IMF deal.

However, analysts have questioned the logic of the deal as the $725mn will have to be replaced to meet all the debt payments due by the end of the year with more expensive borrowing on the local market.

“There was little logic in such a call for Ukraine’s finance ministry, in our view. By not calling the bond at 98.551% on November 2 (or November 1), MinFin would have had to repay it at par on February 28, thus having effectively paid about 4.5% in annualised interest between these two dates. This is definitely much less than MinFin will have to pay for other dollar debt that it will have to attract (e.g. local Eurobonds are being regularly placed by MinFin at the 7.0%-7.5% rate),” Alexander Paraschiy of Concorde Capital said in a note.

“There is no doubt Ukraine will further place local bonds in the near weeks at rates much higher than 4.5%, as it will have to refinance other local Eurobonds that will mature soon ($265mn in November-December, $920mn in January-February). Therefore, it looks like MinFin’s exercising its call option was a condition for its creditor (the holder of discount notes) to invest in new Eurobonds that were placed in October. Meanwhile, holders of the discount notes have earned about 17.1% on their investment since August 27,” Paraschiy added.

Even with the new IMF deal in place, Ukraine is still hard pressed for cash. The IMF deal is only agreed in principle and the IMF board still needs to sign off on the agreement before the next tranche of money is released; investors are expecting the IMF to pay out between $1bn and $1.9bn but only after the 2019 budget is signed into law, which is expected to happen sometime in December. Next year the debt repayments become even more demanding with some $7bn of debt coming due.