Emerging Markets, EBRD editions, May 15 2014
As foreign capital has fled Russia and Ukraine, one of the world’s largest fund managers has taken a contrarian position that appears to show it holding more than one third of Ukraine’s entire outstanding sovereign Eurobonds.
According to filings, Franklin Templeton’s total holdings in Ukrainian dollar and euro bonds stood at $7.6 billion at the end of the first quarter of 2014, having increased by $62 million over the course of the quarter. At the same time, the fund manager sold $29 million worth of Russian holdings to $1.2 billion, less than one sixth the amount it has invested in Ukraine. As at March 31, the $71 billion Templeton Global Bond Fund alone held bonds with a market value on that date of $3.183 billion, and a face value of just over $3.3 billion. Ukrainian debt also appears in various other Franklin Templeton funds, in particular European counterparts to the global product.
By comparison, according to Bloomberg, the total amount of outstanding Ukrainian sovereign Eurobonds is officially US$17.3 billion, although total general government debt is considerably more.
Although in the context of Franklin Templeton’s $190 billion global bond group the total is relatively modest in percentage terms, it is a sufficiently high-conviction move that the group’s chief investment officer, Michael Hasenstab, created a video last month to explain his reasoning to investors.
He said he was attracted to Ukraine by a number of factors. “First, the long-term potential of this country. There’s an incredible wealth of human capital, of agricultural endowment, and Ukraine is strategically in a very important position.”
He said that the less than 40% debt-to-GDP level was manageable, and that the government’s crisis management response was encouraging. “I think the current government has done an exceptional job of tackling not just the short-term issues but really setting the stage for Ukraine to flourish over the next five to 10 years by putting in place very difficult, but very important, structural reforms.”
He also said that the level of support Ukraine had received from the US, Europe, the IMF and the World Bank was encouraging.
Hasenstab is known for contrarian positions, having favoured Ireland and Hungary in the past when others were fleeing it. “Just because the market doesn’t like it, doesn’t necessitate that we do like it,” he said. “But we do look for situations that are out of favour when we go to a country.”
The move is certainly daring: by May 1 Ukrainian dollar bonds had lost an average of 8% year to date, according to JP Morgan Chase indices. It is possible that the manager has pared its holdings since March 31, but Franklin Templeton representatives in London did not immediately respond to requests for comment.
As Emerging Markets reported yesterday, Bank of America Merrill Lynch outlined a scenario in which, with further devolution of Ukrainian provinces, Ukrainian debt would default and have to be restructured, although the bank’s base case was that this would not happen. In BAML’s reading, the tipping point would be if Kharkiv sought independence as well as those provinces that have already voted for it, if those provinces consequently stopped providing money to the central government.