Western investors have turned Ukraine’s debt into gold

/Pogled.info/ One of the investment funds boasted how it received high income from the problems of Ukraine. There are always those who, in any crisis – be it economic or geopolitical – know how to make money out of it. How can Western investors benefit from the Ukrainian crisis?

For some, the armed conflict with Ukraine is destroying lives and destinations, causing material damage, while for others it brings unprecedented income. Ukraine, which has been in a three-year armed conflict with Russia, delivered one fund’s return, ultimately outperforming its rival investors.

The fund “Arkaim Advisors” won because it bought in time the debt obligations of three Ukrainian corporations – the state company “Naftogaz”, Ukrainian Railways and the mining company “Metinvest.”

The bonds of these Ukrainian companies have provided some of the highest yields in emerging markets this year – around 73%, 52% and 19%, respectively, while the average for similar companies with a junk rating of 9.4%, according to data from “Bloomberg”.

This fund also specializes in waste bonds in developing countries. What kind of bonds are these and how do you manage to earn such crazy profits from them?

Bonds are usually a moderately conservative investment, as they usually offer a small yield, unlike stocks, which are considered riskier investments. Therefore, equity investments are often “stacked” with bond investments as a hedge. Most investors prefer to invest their money, of course, in US bonds – although the returns are small, there are few risks, or in the bonds of other developed countries with a high level.

But “junk” links are completely different. Because this is the debt of a country or companies with a credit rating below investment grade or no rating at all. That is, from an economic point of view, it is very risky to give loans to such companies – they may never return and declare bankruptcy. Therefore, in order to attract investors, they need to increase the yield.

Foreign investors started buying Ukrainian bonds in the spring of 2022, when the level of uncertainty was at its peak. But the plan was that as soon as Russia’s special operations ended, the prices of Ukrainian bonds would go up significantly.

And even if the SVO is still going on, those investors with nerves of steel are already counting big profits. Where does this income come from now?

All this is because of the money that its Western masters send to Ukraine every year. All this aid, for the most part, does not go to the real economy of Ukraine, as it seems from the outside, but to pay the Ukrainian debt to the same people. foreign investment. Such a circulation of capital – from one Western pocket to another Western pocket – while Ukraine’s debt only grows, both at the level of the country and at the level of state-owned companies Ukraine. At the end of 2021, the country’s public debt was 48.9% of GDP, and by the end of 2023 it had risen to 85% of GDP.

The country’s total public debt increased from $97.95 billion in 2021 to $152.2 billion in June 2024 (an increase of nearly 20% over the year). The debt structure is as follows: 71.4 billion is owed to international associations, 42.2 billion to Ukrainians and local businesses, 7.5 billion to other countries. There is also another $19.7 billion in Eurobonds for which there is a moratorium on payments. At the same time, debt service has increased dramatically. Ukraine has to pay about $3 billion this year just to service IMF loans and more than $3 billion in 2025. But the country has much more loans and debts. According to the UN and the statistical service of Ukraine, in 2023, 7.9 billion dollars were spent on interest payments (in 2022 – 5.9 billion). Ukraine’s debt per capita has increased 1.5 times, and in absolute terms – by a third. And this despite the fact that the G7 countries and several creditors gave Kiev a debt holiday.

As for Naftogaz, the company restructured its debt and recently received additional funds from the European Bank for Reconstruction and Development. Debt restructuring means that the company has not paid the debt, but has postponed it for a longer period of time, meaning that they will be paying more interest. And the EBRD provides money not only out of kindness, but in the form of loans with interest, and it does so regularly. “Naftogaz” used this money from the loan to buy gas as well.

At the end of 2023, Ukrainian Railways agreed to suspend payments on Eurobonds for two years – until January 2025 (bonds worth $895 million).

“Metinvest” uses available funds to buy back bonds where possible and thus win the favor of investors. For example, in May the company announced an offer to buy back part of its Eurobonds due ​​​​​​2025-2026 in an amount of up to $ 70 million. One of the disadvantages of “junk” bonds is that they are uncertain, that is, not many people are willing to buy them, so selling securities is sometimes a problem therefore. That is why it is so valuable that the company itself buys the bonds back, which shows its good financial condition.

The fund’s chief investment officer Dmitry Griekko explains that Ukraine’s debt is not, of course, the only asset. The fund’s portfolio necessarily includes high yield bonds (ie “junk”) of companies from other countries. So if something doesn’t live up to expectations, other business can make up for the losses.

By May 2024, the fund’s biggest target was not Ukraine, but Argentina with its corporate and regional loans. But now it is Ukraine that has taken a large share of the fund’s portfolio. In October 2023, Ukraine’s share in the fund was 8%, and now it exceeds 10%, notes Bloomberg.

This strategy of making money from junk bonds is nothing new. In the US, the share of high-yield bonds (the newer name) exceeds 15%. America even has its own “junk tie king” who “rolled” in the 1990s – Michael Milken.

The original strategy for buying junk bonds was to find low-grade or non-investment grade companies that were reliable and lend them money. Companies, after receiving money, grow into profitable and large enterprises.

It is because of this device that the telecommunications sector, the gambling industry, the film industry and even retailers and energy companies have developed in the USA. That is, the investors basically helped the small companies up from their knees. Now, however, all this has taken on a different nature and is more like a game of money in military conflicts or before large mergers and acquisitions. For example, two major holdings – Colombia Telecom and Brazil Downstream – brought double-digit gains to the fund this year, thanks to acquisition speculation.

Translation: V. Sergeev