Ukrainian Fixed Income Strategy: Gathering dark clouds in summer

Fixed Income StrategyJuly 1, 2009

Ukrainian Fixed Income Strategy:Gathering dark clouds in summer

Maria [email protected] t. +380 44 254 62 75

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After spring rallying, Ukrainian Eurobonds remain flat/slightly up. Despite investors start considering EM to be overvalued, and the rally looks over, some ideas have been left unnoticed.

It looks like the darkness is gathering in the summer: a large amount of sovereign and quasi-sovereign debt is to be redeemed, and natural gas should be pumped into underground storage bunkers.

We believe, Ukraine will be able to repay its debt in 2009, and prefer short-term notes over long-term and high-quality issues over high-yield.

For those who feel bullish even though the rally is over, we recommend investing in our top picks. Among Ukrainian banks it is UKRSIB11 and PRBANK 12. Among other corporate sector issues, we recommend taking a look at NAFTO 09 and AZOVTL 11, while selling MHP 11.

For those who prefer riskier, ‘junk’-grade bonds but offering high-yield opportunities, we've done a case study of Ukrainian distressed debt and recommend VABANK 10 (43% of par) and XXIC 10 (20% of par), since returns on these issues could become significant.

Recent Reports:Nadra bank: no light at the end of tunnelKernel: Initiating coverage (BUY: FP=$15.56)MHP: Recommendation UpdateUkrainian Steel Industry: Staying Alive

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Sep-08 Nov-08 Jan-09 Mar-09 May-09

EMBI GlobalEMBI+ Ukraine

TOP trading ideasASK

PriceASK YTM Comments

Azovstal 11 79.00 25.50Low-leveraged company, core asset of strong

Ukrainian business group SCM

Naftogaz 09 88.50 63.32 State support should be there

Privatbank 12 65.00 27.87The largest Ukrainian bank in terms of assets

Could count on support of strong Ukrainian Privat Group

UkrSibbank 08/11 93.00 13.20 BNP Paribas subsidiary

Undervalued compared to other bank's issues

VAB Bank 10 43.00 132.80Is priced at the level of banks which are in default on their liabilities – but still paying

coupon

XXI Century 20.00 425.00* Both liquidation and restructuring scenarios leave investors with good return

*estimated return, % of initial investment at current price (ROI)

Source: indicative Bloomberg quotes, Phoenix Capital

EMBI spreads performance

Source: Cbonds

NADRA 10

FIUKR 10

VABANK 10

PIVDE 10

PRBANK 12

UKRSIB 11

KIEV 11

UKRAINE 09

ALFAUA 10

EXIMUK 09

ALFAUA 09

NAFTO 09

FICBUA 10

ALFAUA 11

-15,000 -5,000 5,000 15,000 25,000 35,000

7 best and 7 worst performing Eurobonds in terms of BID YTM change

Source: Bloomberg

The rally is over: some ideas left unnoticed............................................................................................................ 2

TOP investment ideas............................................................................................................................................... 4

Calendar of major upcoming events for 2009........................................................................................................ 5

The crisis is far from over: economic implications for Eurobond issuers........................................................... 6

Corporates: leaving 1Q2009 behind, what’s next?..................................................................................................

Interpipe (INPIP): Cautious hold..........................................................................................................................Azovstal (AZOVTL): Undervalued corporate credit............................................................................................Kyivstar (OKST): An expensive safe haven........................................................................................................Naftogaz (NAFTO): A risky buy................................................................................................................................MHP (MHPSA): Too much popularity...................................................................................................................

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“Junk” bonds case studies: is there any value?.....................................................................................................

First Ukrainian Interbational bank (FIUKR): Hold...............................................................................................Finance and Credit Bank (FICBUA): Hold...........................................................................................................Nadra bank (NADRA): Sell....................................................................................................................................Alfa Bank Ukraine (ALFAUA): Fair YTM of new notes at 60%...........................................................................XXI Century (XXIC): Buy........................................................................................................................................

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Eurobond market data............................................................................................................................................... 20

Appendix 1: Summary of anticrisis measures in agriculture, metals and banks.................................................

Appendix 2: TOP ideas. Companies' financials.......................................................................................................

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Table of Contents

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Fixed-Income Strategy

Strategist’s comment: The rally is over, but some ideas have been left unnoticedLiquidity in global markets has gone up, as has sentiment towards Emerging Markets. Central banks and government efforts have helped restore optimism – but who knows for how long. We remain cautious about global inflationary pressure, which may follow the recent growth in monetary supply. And in the long-run, if inflationary scenarios come true, it would appear wise to look to equity rather than to fixed income instruments.

After the spring rally, Ukrainian Eurobonds experienced only a slight correction in mid-May and then remained flat to slightly up. The rally was supported by global optimism and driven by huge liquidity injections from developed world governments and their central banks, as well as improved sentiment towards Emerging Markets and IMF support to Ukraine. But the liquidity surplus in financial markets, as before, has unpredictable consequences, and nobody knows how long these consequences will last. It must be said, at least, that the Ukrainian market was heavily undervalued in early 2009 (see PHNC “Ukraine's Credit Ratings and Default. Does the Picture Really Look so Gloomy?” from Feb. 26, 2009) and helped correct this imbalance.

As of now, we believe the rally is over, with yields on the Ukrainian Eurobond market already close to pre-crisis levels – and the crisis is far from over. The world economy remains in a downward trend, with the Ukrainian economy still in a critical period. There are some buyers of Ukrainian risk at current levels, but holders remain reluctant to sell, and bid-offer spreads are rather wide. Lately, investors have even begun considering the EM to be overvalued, and Ukraine is one country where such sentiment could prevail. The country continues to reel from political turmoil, as well as the Gazprom-Naftogaz payment problem and the ongoing banking crisis. We therefore believe that Ukrainian risk should be valued higher than before the crisis when comparing it to global EMs. Ukrainian spreads have reached a seven-month low, but this should imply only slightly more optimism than a fair evaluation of Ukrainian risk.

The summer should remain more or less calm, without slides or rallies like those over autumn 2008 to spring 2009. But it looks like the picture is becoming gloomier in Ukraine over its fiscal stability and the banking system. The big boom could fall as early as August-September 2009, when a large amount of sovereign and quasi-sovereign debt (Eurobond issues of $1,250 mln) are to be redeemed, and a large amount of natural gas should be pumped into underground storage bunkers (approx. $3.5 bln in funding for this remains to be found). We believe Ukraine will be able to repay its Eurobond debt in 2009, but the coming months will be an important stress test for the country’s fiscal and economic stamina. After Ukraine 09 redemption, Ukraine 11 and Ukraine 12 Eurobonds prices could increase significantly.

Overall, regarding any investment strategy in the Ukrainian fixed income market, we prefer short-term notes over long-term and high-quality issues over high-yield. From this point of view, the Eurobonds of foreign-owned banks (UkrSibbank, Ukrsotsbank, Forum Bank), sovereign and quazi-sovereign issues look preferable.

Liquidity in global markets has gone up...

... pushing Ukrainian Eurobond prices higher.

As of now, we believe the rally is over

The summer should remain more or less calm, but August-September will be an important stress test for the country

Overall, we prefer short-term notes over long-term and high-quality issues over high yield.

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Sep-08 Nov-08 Jan-09 Mar-09 May-09

EMBI Global

EMBI+ Ukraine

Source: Cbonds

EMBI Global vs. EMBI+ Ukraine

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Our top pick among first-tier Ukrainian banks is UKRSIB11 (undervalued compared to other foreign bank issues) and PRBANK 12 (undervalued compared to PRBANK 16). Among other corporate sector issues, we recommend taking a look at NAFTO 09 and AZOVTL 11, while selling MHP 11. For those who prefer riskier, ‘junk’-grade bonds that offer high-yield opportunities, we recommend VABANK 10 (37.5% of par) and XXIC 10 (20% of par), since returns on these issues could become significant. (Please find respective companies' financials in Appendix 2).

Eurobond Recommendation Price, % of par YTM, % p.a. Maturity Comment

Azovstal 11 BUY 79.00 25.50 28.02.11Low-leverage

Backed by strong parent, Metinvest Demand in metallurgy slowly recovering

Interpipe 10 HOLD 69.00 49.24 02.08.10Over-leveraged company

Dramatic (over 75%) downturn in output No sources of funding, except shareholders support

Kyivstar 12 HOLD 99.00 8.15 27.04.12Low operational risks

Extremely low leverage Support from foreign shareholders

MHP 11 SELL 73.00* 26.06* 30.11.11Strong operational results

Very liquid Eurobond Overvalued comparative to other corporates

Naftogaz 09 BUY 88.50 63.32 30.09.09 State support should be there

XXI Century BUY 20.00** - -Restructuring ahead

Liquidation scenario leaves investors with good returnRestructuring terms are as well very favorable

*BID price and YTM, for others ASK price and YTM used**indicative priceSource: indicative Bloomberg quotes, Phoenix Capital

Eurobond Recommendation Price, % of par YTM, % of par Maturity Comment

UkrSibbank 08/11 BUY 93.00 13.20 08.04.11

BNP Paribas subsidiary (parent to increase its stake by further 8%)

Should be priced with YTM below sovereign curve as at other foreign-owned banks

The issue is priced below other issues of UkrSibbank

Privatbank 12 BUY 65.00 27.87 06.02.12

The largest Ukrainian bank in terms of assetsCould count on support of strong Ukrainian Privat

GroupCould count on state support in need

The issue is undervalued compared to PRBANK 16

VAB Bank 10 BUY 43.00 132.80 14.06.10

Ukrainian bank co-owned by Israeli Kardan Group and a Ukrainian citizen

Is priced at the level of banks which are in default on their liabilities – but still paying coupon

Low leverage: Eurobond issue is the only foreign debt to be redeemed

Nadra 10 SELL 13.00* 415.17* -

Restructuring or liquidation aheadThe restructuring terms are unfavorable, with the

most optimistic recovery of 11,5% of parIn case of liquidation recovery rate will be close to

zero

*BID price and YTM, for others ASK price and YTM usedSource: indicative Bloomberg quotes, Phoenix Capital

Top pics

Summary of recommendations on corporate Eurobond issues

Summary of recommendations on banking Eurobond issues

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Major upcoming events that could determine market movements include the IMF’s decision on the third $3.8 bln tranche of the $16.5 bln loan to Ukraine which, according to Prime Minister Yulia Tymoshenko, could be given as soon as the end of July, depending on the outcome of the talks. The decision on the IMF’s 4th tranche, as well as EBRD participation and other funding from abroad, hold considerable importance for the public and banking sectors. Among other events we should note several debt restructuring proposals, which will be accepted or rejected this summer. Investors’ attitude towards borrowers and further developments (debt restructuring or bankruptcies) will determine prices on high-yield segment Eurobonds.

Event July August September October November December

Overall environment and sentiment NeutralExtremely

riskyExtremely

riskyNeutral to

negative Positive Neutral

Corporate debt

FORUM 09 maturity, $100 mln 30.01.2009

ALFAUA debt restructuring proposal 22.12.2009

NADRA debt restructuring proposal

FIUKR debt restructuring proposal

XXI Century debt restructuring proposal 08.07.2009

Sovereign and quasi-sovereign debt

UKRAINE 09 maturity, $500 mln 05.08.2009

EXIMUK 09 maturity, $250 mln 23.09.2009

NAFTO 09 maturity, $500 mln 30.09.2009

Major macro and industry events

Monthly gas payments, $600-800 mln a month 07.07.2009 07.08.2009 07.09.2009 07.10.2009 07.11.2009 07.12.2009

Payments for gas stored underground, total of approx. $3.5 bln

EBRD meeting on loans to Ukrainian entities

IMF 3rd tranche decision

IMF 4th tranche decision 15.11.2009

Six months to Presidential elections 17.07.2009

UEFA final approval on Euro 2012 in Ukraine

1Q2009 data on GDP publishing 01.07.2009

2Q2009 data on GDP publishing 01.10.2009

Seeding campaign

Source: Phoenix Capital estimates

Major upcoming events for 2009

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At present, the positive newsflow is coming from global markets and Ukraine’s co-operation with IFIs, but we believe the crisis is far from over. Public finances in Ukraine are in poor shape, with a huge hidden budget deficit and the government all but begging for money to make monthly gas payments and pump gas into underground storage bunkers. Banks, meanwhile, continue to suffer from growing NPL level, funding outflows and undercapitalization. Many other companies are suffering from the global downturn in demand and falling commodity prices, and the government must somehow deal with this mess ahead of the 2010 Presidential elections. Below we will try to examine the implications of these major economic developments on the Eurobond market.

The government has announced plans to collect UAH 239 bln in budget revenues in 2009 with expenditures of UAH 267 bln. Deficit and debt repayments are to be financed by borrowing UAH 88 bln. The budget, which is based on assumed GDP growth of 0.4%, is unrealistic in our opinion, though we still think the government’s current budget targets could be reached in 2009, but only through an increase in the money supply. The government’s anti-crisis measures, including support for agricultural producers, steel mills and banks, looks underfinanced but will still put additional pressure on the budget, especially with respect to bailing out troubled banks and other economic support programs now in play (please see Appendix 1 for details of Ukraine’s anti-crisis measures).

Sovereign debt repayments total $2.0 bln through the end of 2009. Even if we add $0.7 bln of quasi-sovereign debt repayments, the total remains insignificant compared to the $27 bln of current foreign reserves;

The state budget includes UAH 125 bln to be redistributed through the Finance Ministry. This is much more than the UAH 67 bln from last year, and the Ministry can now redirect money flows from other spending to meet its foreign debt obligations;

The current account deficit is insignificant, totaling $600 mln over January-April and seems set to continue to improve against a background of rapidly shrinking import. A positive C/A would allow the government to spend less of its foreign reserves on hryvnia interventions and instead make that money available for foreign debt repayments;

The EBRD and the World Bank have recently agreed to provide Ukraine with new loans. Moreover, we expect that they will also prolong the country’s existing debts, and foreign banks with operations in Ukraine have announced plans to inject $2 bln-3 bln into their Ukrainian affiliates. All of these measures will match net capital outflows from Ukraine this year, which will in any case be much lower than foreign debt repayments of $12 bln in 2H2009;

The IMF announced it will give an additional $7 bln loan to Ukraine by the end of 2009 ($2.8 bln was already given in May). These funds are allowed to be used to fund the budget deficit and help the government manage its external liabilities.

The crisis is far from over: economic implications for Eurobond issuersWe believe the crisis is far from over despite the positive newsflow

The budget is in poor shape…

… but a sovereign default is unlikely

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Though the situation in the Ukrainian banking system has started to show positive signals, dark clouds are gathering on the horizon, as banks will face huge write-offs as early as 3Q2009. The writing is already on the wall thanks to several banks (losses of UAH 12 bln in 5M2009 were the result of UAH 28 bln in loan loss provisioning), so tough times lie ahead for domestic banks. According to our estimates, approximately 50% of problem loans could be restructured, whether by granting grace periods or delaying maturities, but this will put pressure on interest income. However, with the increased cost of borrowing, interest expenses will rise, but a more serious problem is the liquidity gap that typically appears between long-term, often restructured loan portfolios and short-term (up to three-month) funding bases created by current accounts and individual deposits. Money for the long-run (long-term deposits, syndicated loans, Eurobonds) remains a question mark for the future. We believe those banks receiving government help and those relying on funding from European parent banks or IFI funding will emerge the winners in the very end and could acquire larger market shares, as weaker banks lose clients and even go bankrupt.

As such, we prefer to take an extremely conservative approach to banking risk; investment opportunities for conservative investors among banks should therefore include UKRSIB, USCBUZ, FORUM and EXIMUK (please see “PHNC Ukrainian Banking Eurobonds: Family Matters” from Mar. 26, 2009). At current levels, liquid foreign bank Eurobonds looks more or less adequately priced. Offers on FORUMZ 09, USCBUZ 10, EXIMUK 09 and 12 and UKRSIB 10 are too low to be interesting – slightely overvalued due to a lack of sellers – and spreads remain too wide to sell these bonds at BID levels. In the short-term, prices on UKRSIB 11 (with maturity in August) could rise on both the bid and offer sides. We believe it should be priced better than sovereign issues as other foreign bank debts are.

The recapitalization of troubled banks began on June 10, 2009, when the government injected UAH 9.6 bln of authorized capital into Ukrgazbank, Rodovid Bank and Kyiv Bank, in effect nationalizing them. Ukrgazbank received UAH 3.2 bln in exchange for the state receiving an 84.21% stake; Rodovid bank received UAH 2.81 bln in exchange for a 99.97% stake; and Kyiv Bank was given UAH 3.56 bln for a 99.93% stake.

With the injection, the IMF’s requirement to launch bank recapitalization has been met and we do not see any reason for the Ukrainian government to recapitalize any other banks. Delays in the recapitalization of Nadra Bank and Ukrprombank are therefore very likely we believe. In any case, the government will not repay these banks’ debts anytime soon but only after these are restructured. Finance and Credit Bank and Imexbank have put recapitalization negotiations on hold and probably will be denied government help.

Recent economic developments in Ukraine demand that we take a look at the EBRD’s activity in the country. The bank has recently announced that it intends to invest EUR 1 bln on different projects here, with half of this amount to be devoted to the banking sector. EBRD loans to banks are usually long-term (3-10 years) and subordinated so they can be added to the bank’s Tier 2 capital. The EBRD has already invested over $750 mln into Ukraine this year and plans to spend approx. $670 mln more. We expect EBRD targets to be Forum Bank, UkrSibbank, Megabank and ProCredit Bank, plus local infrastructure and agriculture projects. Help from the EBRD is very important for these banks’ capital and for the survival of the Ukrainian banking system in general.

The situation is much worse in the banking sector…

… but the government’s bail-out could help …

GAINERS:NADRAFICBUA

… as well as that of the EBRD and other IFIs

GAINERS:UKRSIBUSCBUZEXIMUKFORUMZ

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We forecast a 9.9% y-o-y decline in Ukraine’s GDP for 2009, including a 15.4% y-o-y drop in industrial output. The downturn has caused numerous problems: a significant drop in production in the metallurgy (AZOVTL) and pipe sectors (INPIP), a decline in gas consumption and slackening payment discipline (NAFTO), and a drop in households’ income which, in turn, has led to a severe crisis in the public finance and banking sectors (sovereign, City of Kyiv, banks). At the same time, the oil prices decline in 2H2008 put Naftogaz’s costs down. We still assume a global recovery to start in 4Q2009 and expect industrial production in Ukraine to hit rock bottom over 2Q-3Q2009. These forecasts are supported by positive signals that have started to come from industry and agriculture.

Metallurgy production volumes and prices have started to slowly recover with new orders from Southeast Asia and China. In May, the domestic steel industry saw output increase 9.3% m-o-m. The pipe sector is far from stable, with production volumes at 55% of pre-crisis levels. The first signs of recovery must wait for oil & gas demand to return and infrastructure projects to be launched. And if rising oil prices give us some reasons for optimism, state infrastructure projects and the communal service sectors (major Interpipe consumers) are unlikely to enjoy a recovery in the foreseeable future. At the same time, currently rising oil prices (to $70 per barrel from $40 in the bottom) mean hard times for Naftogaz and for Ukraine’s state budget and current account, as imported gas price in 3Q2009 could decline to $240 per tcm from the current $270 per tcm but then rise to $250 per tcm in 4Q2009 (implying an oil price level of $65 per barrel).

After the hryvnia depreciated in autumn-winter (the interbank rate changed from UAH 4.60/US$ to a peak of UAH 9.50/US$), it strengthened and reached UAH 7.65/US$ as of June 18, 2009. A period of relative stability has lasted since March 2009, and a stable hryvnia favors domestic sellers and importers – which have obligations in foreign currency – as well as municipals and the state. By contrast, UAH appreciation has hit domestic exporters, whose goods have lost their competitiveness against the background of an overall decline in global demand. For 2009 we expect the hryvnia to be stable or even to slightly depreciate (target exchange rate – UAH 8.50/US$), with a slight depreciation also expected for early-2010.

The political outlook that was expected to bring changes in June, when the formation of a broad coalition seemed possible, has instead only resulted in minor change. We expect the president will be elected in January 2010 through a general election, with one of three candidates – former PM Viktor Yanukovych, current PM Yulia Tymoshenko and former Parliament Speaker Arseniy Yatsenyuk – likely to win the poll. No one political force will dominate the race and so the confrontation between the branches of power will remain. The political situation, at least until parliamentary elections in 2012, will be unlikely to differ from that seen in recent years.

Global economic and commodity price slumps have heavily affected Ukraine…

… but metallurgy has shown some signs of recovery

Hryvnia stability favors domestic sellers and importers

The political situation has brought no changes to the market

GAINERS: LOSERS:

AZOVTL INPIPNAFTO

GAINERS: LOSERS:

NAFTO AZOVTLINPIPNAFTO

GAINERS: LOSERS:

NAFTOMHPBANKS

AZOVSTLINTPIP

7.007.207.407.607.808.008.208.408.608.80

2-Mar 16-Mar 30-Mar 13-Apr 27-Apr 11-May25-May

BidAsk

Source: Ukrdealing

UAH/$

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Event/trend Impact Gainers (Losers)Government anti-crisis measuresBanks + NADRA, FICBUA, EXIMUKMetallurgy + AZOVTLOil & gas + NAFTOIFI help

Banks + FORUM, UKRSIB, USCBUZ, EXIMUK

Agriculture +

Infrastructure +Commodity price slumpMetallurgy - AZOVTLPipes - INPIPOil&gas + NAFTOEconomic downturn

Banks -NADRA, FICBUA, VAB, FIUKR,

PIVDE, UKRSIB, USCBUZ, FORUMZ, EXIMUK, PRBANK, ALFAUA

Metallurgy - AZOVTLOil & gas - NAFTOPipes - INPIPMunicipal - KYIV CITYHryvnia stability/appreciation

Banks + NADRA, FICBUA, VAB, FIUKR,

PIVDE, UKRSIB, USCBUZ, FORUMZ, EXIMUK, PRBANK, ALFAUA

Domestic sellers, importers + MHP, OKST, NAFTO, KYIV CITYExporters - AZOVTL, INPIPSource: Phoenix Capital

Summary of macro and operating environment implications

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Interpipe has suffered from a downturn in pipe demand (mainly the result of reduced funding for infrastructure projects) maybe more than all other Ukrainian issuers. Its largest mill – Interpipe NTRP – has seen monthly production decline in September 2008 by 76% from its peak to 11,000 tonnes in April. Other mills have performed the same or even more poorly. Together with the heavy price correction, the drop in demand has hit Interpipe particularly hard, leading us to expect a significant deterioration in the company’s financials: profitability and debt ratios are likely to appear dramatically worse than 1H2008 results, and we do not exclude the possibility of net loss in 1H2009.

Interpipe’s future depends on pipe demand. If the current situation lasts through 2H2009, the company could suffer substantial losses, leaving only shareholders to redeem company debts. Any early signs of revival will stem from increases in world crude oil prices and communal infrastructure investments reviving, as well as Interpipe changing its production mix in favor of railcar wheels.

The company performed a buy-back of its Eurobonds (the buyer was Millen Financial Ltd.) and a meeting of bondholders agreed changes to the covenants on Interpipe’s Eurobond issue in exchange for a 1.5pp coupon rate increase, to 10.25% p.a. The covenant on leverage ratio was increased from 3.5 to 4.5, and a $355 mln loan, secured by SACE, was added to the list of permitted indebtedness. We doubt the company will comply with this leverage ratio when it releases its FY2009 financials (though for 2008FY IFRS financials the situation could be rescued by posting strong 1H2008 results together with today’s lower steel prices, Interpipe’s major input).

As of Dec. 18, 2008, Interpipe had total debt of $970 mln, of which $465 mln was secured by company assets. Interpipe’s 1H2008 EBITDA totaled $170 mln (expected FY2008 EBITDA is $300 mln-350 mln), and is expected to decline dramatically in 2009. Given unsecured status of $200 mln in Eurobonds, Fitch assumes a 31-65% recovery of this debt in the event of default.

The good news is that Interpipe’s main beneficiary, Viktor Pinchuk, is likely to support the company. He appears to have the cash to do this following the sale of Ukrsotsbank, Ukraine’s 4th-largest bank, to Italy’s UniCredit Group for $2 bln in 2007.

Corporates: leaving 1Q2009 behind: what’s next?

• The Interpipe Eurobond is being offered at 49% YTM, implying a 2,800 bps spread over the sovereign curve. A substantial share of the issue was bought back by an Interpipe affiliate company at a price below par, meaning the issue is no longer very liquid.

• We believe a fair level exists at 2500-3000 bps, thus this Eurobond should be rated as a Hold, while holders should very carefully examine the situation in the domestic pipe business.

• Dramatic output decline over 2H2008-1H2009 and redundant leverage are bad signs for investors.

• Early signs of a revival in the pipe market could boost the Interpipe Eurobond, but if the situation continues into 2H2009, the company could wind up unable to redeem its debt without the help of its main shareholder, Ukrainian businessman Viktor Pinchuk.

Interpipe: Cautious hold

Interpipe financials, IFRS, $mln2007 1H2008

Revenues 478 804

EBITDA 154 278

Net income 47 180

Assets 953 1,359

Equity 419 781

Financial debt 427 436

Debt/EBITDA 245% 127%

Debt/ Equity 102% 56%

Source: Interpipe

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Jan-08 May-08 Sep-08 Jan-09 May-09Seamless pipes 168-325 mmSeamless pipes 57-159 mmSource: Metal-Courier

Average prices on seamless pipes, FOB, Black and Azov sea

0102030405060

Jan-08 May-08 Sep-08 Jan-09Interpipe NTRPInterpipe NIKO TUBEInterpipe NMPP

Interpipe mills monthly tubes production, '000 tonnes

Source: Metal-Courier

-8000-6000-4000-200002000400060008000

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120

Jan-08 Jul-08 Jan-09

BID YTM, % (lhs)Spread over sovereign curve, b.p. (rhs)

Interpipe 10 performance

Source: Bloomberg

Interpipe 10 issue parameters

YTM, %* 49.24

Price, %* 69.00

Redemption Aug 2, 2010

Amount, $mln 200

Coupon, % p.a. 10.25

Frequency S/A

*offer

Source: Bloomberg

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R:213 G:53 B:27

PMS 179C

C:10 M:30 Y:42 K:0

R:230 G:188 B:151



Azovstal’s operational activity was badly hit by the global downturn, the decline in metal prices, and its low volume of orders. However, strong growth in 1H2008 laid the groundwork for good operational results for FY2008. In 2009 the situation will likely be much tighter, as the company has announced plans to decrease crude steel production by 39% y-o-y. In any case, we believe this AZST forecast is too pessimistic given the current recovery underway on global steel markets.

We expect Azovstal to be able to service its foreign debt. Azovstal is currently operating at approx. 58% of its total steel production capacity, having produced 1.25 mln tonnes of crude over January-May (-41% y-o-y). Despite an announced 39% decline in crude steel output in 2009 (to 3.36 mln tonnes) and a reduction in its rolled steel output of 41.4% y-o-y (to 2.96 mln tonnes) brought about by major declines in steel prices, the company should be sustainable in the mid- and long-term. Azovstal’s greatest competitive advantage is its vertical integration, which provides for stable product demand from related European re-rolling mills, while also ensuring a stable and cheap supply of raw materials.

The company’s Debt/EBITDA ratio under UAS for 2008 was 0.31x, while its share of short-term debt is negligible at 0.9%. Azovstal’s EBITDA was $571 mln in FY2008. For 2009, we assume a 30% drop in output and a 50% decline in selling prices for its products, meaning EBITDA will be much lower, at $175 mln-200 mln, but still leaving its Debt/EBITDA ratio lower than 1.0x.

Azovstal parent Metinvest Group maintains a strong financial position compared to other Ukrainian companies. Despite the weak demand for steel products in general, Metinvest has been able to generate positive results in the first few months of 2009 and also benefits from the substantial depreciation of the Ukrainian hryvnia and its self-sufficiency in raw materials, both of which give the company a significant cost advantage against other steel mills focused on semi-finished products.

Free cash flows generated by the holding have helped finance the first installment of Metinvest’s acquisition of U.S.-based United Coal Company. We cannot estimate the real level of leverage that Metinvest will have after the acquisition, as UCC is not a public company, but in general our filings about the group’s leverage are more positive than cautious. Metinvest’s short-term debt payable in 2009 (as of Dec. 31, 2008) is approx. $0.7 bln, which coincides with its cash and accounts held in various banks (mainly foreign). The group’s total debt was $2.5 bln as of Apr. 1, 2009, and is mainly long-term in nature.

According to Moody’s, in 2008 Metinvest generated revenues of $13.3 bln and had operating profits of $4 bln. We believe its operational profit is sufficient for short-term debt redemption of the Metinvest Group (except for those of UCC, which are unknown) and will allow it to accumulate funds for further redemptions.

Azovstal: Undervalued corporate credit• AZOVTL is still relatively cheap compared to local peers, particularly MHP.

AZOVTL 11 is on offer at 25.5% YTM, implying a 1,245 bps spread over the sovereign curve. We believe a fair level should stand between 750-1,000 bps.

• Despite the expected 30% decline in output in 2009, we expect Azovstal to be able to service its foreign debt.

• Parent Metinvest Group (controlled by the SCM holding) has a consolidated debt/EBITDA ratio below 1.0, and Azovstal itself has low levels of leverage.

Azovstal financials, IFRS, $mln2006 2007

Revenues 2,467 3,294

EBITDA 343 558

Net income 139 349

Assets 2,627 3,615

Equity 1,825 2,670


Debt/EBITDA 90% 28%

Debt/ Equity 19% 9%

Source: Azovstal

Azovstal 10 issue parametersYTM, %* 25.50

Price, %* 79.00

Redemption Feb 28, 2011

Amount, $mln 175

Coupon, % p.a. 9.13

Frequency S/A

*offer

Source: Bloomberg

00.10.20.30.40.50.6

Jan-08 May-08 Sep-08 Jan-09 May-09

Crude steel Rolled steel Pig iron

Source: Metal -Courier

AZST production structure

0200400600800

100012001400

Jan-08 May-08 Sep-08 Jan-09 May-09

Billet Rebar Slab HRC

Source: Metal-Courier

Steel products prices, $/tonne, FOB, Black

-2000

0

2000

4000

6000

8000

10000

0

20

40

60

80

100

120

Jan-08 Jul-08 Jan-09BID YTM, % (lhs)Spread over sovereign curve, b.p. (rhs)

AZOVTL11 performance

Source: Bloomberg, Phoenix Capital estimates

12

C:0 M:91 Y:100 K:60

R:122 G:31 B:16

PMS 483C

C:10 M:90 Y:100 K:0

R:213 G:53 B:27

PMS 179C

C:10 M:30 Y:42 K:0

R:230 G:188 B:151



Kyivstar, being the low leveraged mobile telecommunications firm in Ukraine, has hardly felt the global economic downturn. Its shareholders, Norway’s state-owned Telenor and Russian firm Altimo (Alfa Group) seem to have finally found common ground and have held several recent shareholders meetings in which the two sides have reached agreement on distribution of $1 bln in dividends from 2004-2005 and 2006-2007.

Ukraine’s largest mobile phone services operator is overly liquid, having $1 bln in cash as of Jan. 1, 2009, and $730 mln as of Apr. 01, 2009, with total company liabilities of $272 mln as of Apr. 1, 2009. Needless to say, the dividend payouts will not damage the company’s liquidity profile. Though Kyivstar’s revenue and profits declined in USD-terms due to the hryvnia depreciation ($130 mln of net profit in 1Q2009 vs. $217 mln in 1Q2008), its efficiency remains very high, with an EBITDA margin of 58% and net margin of 36% based on 1Q2009 results.

We believe Kyivstar is the best corporate credit in Ukraine, though its Eurobonds are very expensive compared to other Ukrainian issues, including sovereign Eurobonds, and attractive for conservative investors only. According to unaudited company financials available on their website), Kyivstar has just $90 mln outstanding from its $175 mln Kyivstar 12 par value Eurobond. The rest is likely to be bought out by the company.

Kyivstar: An expensive safe haven• Kyivstar Eurobonds seem to have been a safe haven during the crisis, as the

telecom business is well insulated against the economic downturn.

• Low operational risk, a stable business model, extremely low leverage and the presence of foreign shareholders helps the company’s Eurobonds to trade close to par, with a negative spread over the sovereign curve even in Autumn 2008.

• YTM of the Kyivstar 12 Eurobond is 8.15%, which is not of interest for risk-inclined investors, but may be suitable for conservative ones.

Kyivstar financials, IFRS, $mln2007 2008 1Q2009

Revenue 2,148 2,465 360

EBITDA 1,251 1,458 211

Net profit 697 947 130

Total assets 3,024 2,267 1,916

Total equity 2,023 1,515 1,644

Financial debt 434 124 90

Financial debt/EBITDA 35.0% 9.0% -

Financial Debt/Equity 21.0% 8.0% 5.0%

Source:Kyivstar

-4000

-3000

-2000

-1000

0

1000

2000

0

5

10

15

20

25

30

Jan-08 Jul-08 Jan-09BID YTM, % (lhs)Spread over sovereign curve, b.p. (rhs)

OKST 12 performance

Source: Bloomberg, Phoenix capital estimates

Kyivstar 12 issue parametersYTM, %* 8.15

Price, %* 99.00

Redemption Apr 27, 2012

Amount, $mln 172

Coupon, % p.a. 7.75

Frequency S/A

*offer

Source: Bloomberg

13

C:0 M:91 Y:100 K:60

R:122 G:31 B:16

PMS 483C

C:10 M:90 Y:100 K:0

R:213 G:53 B:27

PMS 179C

C:10 M:30 Y:42 K:0

R:230 G:188 B:151



Our understanding of Naftogaz risks takes into greater consideration the general fiscal and political environment in Ukraine and the government’s attempts to rescue the company rather than manage its own financials. The company’s standalone quality is poor, as it has to provide subsidized gas to local consumers at prices lower than is paid to Russia for imports. For 2009, imported gas prices were calculated with a formula widely used in Europe. For 1Q2009 the total was $360 per tcm and for 2Q2009 it was $270.5 per tcm, and for 3Q2009 we expect it to be $200 per tcm, then increasing to $220 per tcm in 4Q2009 due to oil priced rising. At the same time, gas prices for local consumers are fixed by the National Energy Regulation Committee (NERC) at unsustainably low levels ($53-216 for households and $253-266 for industrial consumers, excluding VAT and other fees). These payment levels, especially from the side of communal utilities, leave Naftogaz with huge accounts receivable, though since 2010 prices for industrial consumers will be established on quarterly basis.

The Russia-Ukraine gas contract assumes very strict payment discipline and liquidity gaps have to be covered by borrowing. Naftogaz still needs money to pay for the gas it consumes on a monthly basis (the bill is $600 mln-800 mln per month), and according to UAS results for 2008, it has $2.5 bln of short-term debt to be repaid but with just $261 mln of available cash. The company’s financial plan FY2009, approved with a $1.3 bln surplus, still assumes a $3.5 bln-4 bln funding deficit for pumping gas into underground storage containers.

We have not changed our opinion on the government’s willingness to support the company; avoiding default on Naftogaz debt will help the government in at least three areas:

• Positive internal political ratings, as Naftogaz will be a favorite topic for speculation ahead of the presidential elections;• Securing an international reputation as a reliable gas transit partner, as well as supporting a positive credit history to receive funding from the IMF, EU and other foreign lenders in future; and• National security considerations, as Naftogaz is of great strategic importance for the country.

The steps taken by the government up to the present moment support our view:

• Naftogaz has received UAH 18 bln in loans from state-owned Oshchadbank, which was funded by government injections into the bank’s statutory fund; • Naftogaz has redeemed its three-year $200 mln L+165 bp bilateral to Standard Bank with the help of loans from state-owned banks; and• The Ukrainian government has authorized an increase in Naftogaz’s share capital by UAH 18.6 bln, to UAH 24.16 bln. Naftogaz subsidiaries Ukrtransgaz and Ukrgazvydobuvannya will also see their statutory funds increased, though final approval will only be possible after final amendments are made to the 2009 state budget.

Naftogaz: A risky buy• We regard Naftogaz as a buying opportunity for risk-inclined investors.

• We believe it will trade at the sovereign level plus a risk premium of approximately 750-1,250 bps given that the probability of state support is high. The NAFTO 09 spread over Ukraine 09 now stands at 3,450 bps, which seems unnaturally wide (and at the same time too tight for those who are bearish on NAFTO).

• The point of no return will be the maturity of the Ukraine 09 Eurobond on Aug. 5, 2009, which is prior to the Naftogaz maturity on Sept. 30, 2009. After the sovereign Eurobond maturity, the chances of a successful redemption of Naftogaz should surge.

Naftogaz financials, IFRS, $mln2006 2007

Revenues 5,460 6,025

EBITDA 335 1,145

Net income -431 -13

Assets 20,685 21,513

Equity 11,028 11,298

Financial debt 2,409 2,549

Debt/EBITDA 720% 223%

Debt/Equity 22% 23%

Source: Naftogaz

-10000

-5000

0

5000

10000

15000

20000

25000

0

50

100

150

200

250

300



NAFTO 09 performance

Source: Bloomberg, Phoenix capital estimates

Naftogaz 09 issue parametersYTM, %* 63.32

Price, %* 88.50

Redemption Sep 30, 2009

Amount, $mln 500

Coupon, % p.a. 8.13

Frequency S/A

*offer

Source: Bloomberg

14

C:0 M:91 Y:100 K:60

R:122 G:31 B:16

PMS 483C

C:10 M:90 Y:100 K:0

R:213 G:53 B:27

PMS 179C

C:10 M:30 Y:42 K:0

R:230 G:188 B:151



MHP is a large, vertically integrated poultry producer. It owns and operates companies involved in all stages of the poultry production process, from feed grains and fodder production to egg hatching and grow out farms to processing, distribution and sales channels. We assume that MHP’s vertically integrated production allows the company to control up to 70% of COGS. Poultry is the cheapest meat product in Ukraine and the elasticity of demand for the product is low, allowing prices to be increased.

A recent boost in output has led revenues and EBITDA to skyrocket, but the company’s debt burden remains high. Total revenues for MHP rose by 69% y-o-y in 2008, to $803 mln, while EBITDA increased to $301 mln (+92% y-o-y), with EBITDA margin rising to 37.5%. The government has extended VAT payment benefits and the fixed agricultural tax for agribusinesses through 2009, both of which benefit MHP, but direct state subsidies ($48 mln in 2008) are unlikely in 2009. This will drag MHP’s EBITDA down, so to compensate for this the company plans to increase the selling price of its poultry.

Leverage levels are slightly above the comfort level; the company needs to renegotiate some of its debt. MHP’s Debt/Equity ratio stands at 1.47x (1.02x in 2007), but management feel comparatively comfortable with this, even at current debt levels, given MHP’s large share of long-term debt and established long-term relations with banks and other lenders. MHP’s leverage decreased in 2008 due to the growth of production volumes and an improved EBITDA margin, while the company’s financial Debt/EBITDA ratio declined from 2.7x in 2007 to 1.7x in 2008. The company’s maximum debt redemption obligations stand at $109 mln for 2009, according to MHP management. At the same time, a $20 mln loan from OTP Bank has already been rolled over to 2010, and a $35 mln loan from ING Bank is actually a revolving committed credit facility, which will mature in 2010, but was reported as a short-term loan in MHP’s IFRS statements due to its semi-annual pay-out.

Funding sources mean the company has working capital, but just barely. The company plans to finance its $150 CAPEX ($40 mln of which has already been spent in 1Q2009) and redeem existing short-term debt from available cash, new debt facilities (already committed) of $25 mln-40 mln and from other internal sources. If hryvnia dynamics become less volatile than we expect, the company’s financial position will appear much stronger: At the current UAH/US$ exchange rate, MHP would realize 2009 EBITDA of approx. $250 mln. Note that the company anticipates receiving $100 mln in USD-denominated revenues from sunflower oil sales in 2009, thus providing a partial hedge against currency risks. In our view, hryvnia depreciation could place the company in a very tenuous situation, but with debt repayment and execution of its CAPEX program manageable even despite such currency risks.

MHP: Too much popularity• The MHP 11 Eurobond is now on offer at 78% of par, which corresponds with a

yield to maturity of 22% and an 848 bps spread over the sovereign curve, the lowest among Ukraine’s corporate Eurobond market, excluding Kyivstar.

• The note skyrocketed on the release of the company’s financial results (accompanied by a conference call) and now looks rather overvalued. We understand the high liquidity and popularity of the issuer but consider the price too high compared to other Ukrainian issues.

• MHP is well-positioned in the ongoing financial crisis from an operational point of view, but its leverage is slightly higher than what we consider comfortable.

MHP financials, IFRS, $mln2007 2008

Revenues 474 803

EBITDA 157 301

Net income 47 5

Assets 953 925

Equity 419 346


Net Debt/EBITDA 259% 142%

Financial debt/ Equity 102% 147%

Source: MHP

MHP 11 issue parametersYTM, %* 22.60

Price, %* 78.00

Redemption Nov 30, 2011

Amount, $mln 250


Frequency S/A

*offer

Source: Bloomberg

-6000-4000-200002000400060008000

01020304050607080



MHP 11 performance

Source: Bloomberg

1.1 1.21.0

1.71.5 1.7

1.9

0.8 0.87

1.6 1.51.7 1.9

2.1

2.7 2.7

1.9

1.38

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09

Poultry COGS, USD per kgSeling price, USD per kg

Source: MHP, Phoenix Capital estimates

MHP average COGS vs selling price, $/kg 2007-2008

0

10

20

30

40

50

60

1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09

MHP production volume, '000 tonnes

Source: MHP, Phoenix Capital estimates

15

C:0 M:91 Y:100 K:60

R:122 G:31 B:16

PMS 483C

C:10 M:90 Y:100 K:0

R:213 G:53 B:27

PMS 179C

C:10 M:30 Y:42 K:0

R:230 G:188 B:151



Restructuring case

Issue par value, $ mln 275

Assumed coupon rate 11.75%

Assumed amortization schedule Annual beginning in 2011

Assumed maturity 2013

NPV of cash flows on restructured bond, % of FIUKR 10 par

98%


«Junk» bonds case studies: is there any value?

First Ukrainian International Bank (FIUKR): HOLD

First Ukrainian International Bank (FIUKR), Ukraine’s 13th-largest bank by assets, failed to redeem its $10 mln loan to Cargill Financial Services in April 2009 and has entered technical default. The bank announced its intention to restructure its foreign debt, which is rather an advance measure given the bank’s deteriorating loan portfolio quality. FIUKR’s $168 mln cash position, though rather strong, is still insufficient to cover its $479 mln of public liabilities which come due in 2009 or its other $421 mln of debt, including bilaterals and trade financing.

Currently, the FIUKR 10 Eurobond is trading at 53-58% of par. The demand for the issue is stable and high, and the price is following a positive bias. This leads us to believe that the market is anticipating parent company System Capital Management (SCM) to repay FIUKR’s debts.

However, we are concerned about the level of support for the bank that can be expected from SCM. At present, SCM is focused on supporting its core assets, Metinvest and DTEK. After spending considerable funds to purchase United Coal Company (estimated price- $1.4 bln-1.7 bln), SCM itself may suffer a liquidity squeeze. Supporting FIUKR’s debt could therefore become burdensome and unappealing to SCM shareholders given the size of the bank’s liabilities. The first step towards neglecting the bank has already taken place by allowing it to default on the Cargill loan, which pales in comparison to SCM’s assets.

Restructuring case scenarioFor the purpose of analyzing a possible recovery in the case of restructuring, we have made several assumptions on possible restructuring offer, which would likely be attractive for investors. It would include extension of the loan maturity date for 3 years (to Feb. 16, 2013), adoption of an annual amortization schedule starting from 2011, and change of the interest rate from 9.75% to 11.75%. We use the MID YTM of the Ukraine 13 Eurobond as discount ratio (14.89%). This brings us a recovery rate of 98% if the coupon is capitalized.

Liquidation case scenarioThe liquidation case scenario could come to pass, but only if debt restructuring is rejected. The scenario at first glance looks quite attractive (assuming 100% Eurobond par value recovery rate), but the risk exists that the actual recovery rate on unsecured debt will be at a very low level – common for all Ukrainian banks.

• The main issue lying in the forefront of investors’ minds these days is whether a company in default will survive or be liquidated, and what return on investment can be expected in such cases. We have made certain assumptions with respect to liquidation and restructuring scenarios for each of the following companies and have evaluated the recovery bondholders could expect to receive in each case.

• International rating agencies have assigned a recovery rating for the senior debt of

most Ukrainian corporates and banks at 31%-50% of current principal and related interest. In our opinion, the recovery on defaulted banks’ Eurobonds with respect to our liquidation scenario seems much lower.

• We have chosen XXIC as our top pick in this risk-filled segment as bondholders should benefit in case of either liquidation or restructuring at the company.

Liquidation case

Total assets, $ mln 2,409

Assumed loans recovery, %* 86% 81% 76%

Total adjusted assets, $ mln 2,147 2,053 1,959

Total liabilities, $ mln 1,973

Eurobond recovery rate (% of par) 100% 100% 95%

* Recovery rates in optimistic scenario refer to FIUKR management estimates


FIUKR Debt profileAmount,

$mlnMaturity/

Put

Syndicated loans 204 2009

LPN (Eurobond) 275 Feb 16, 2010

Local bonds 121 2010-2011

Bilateral and trade finance 421 2009-2014

Source: FIUKR’s 2008 UAS results

FIUKR's financials, UAS, $mln2008 1Q09

Total Assets 2,618 2,409

Total shareholder equity 453 437

Total liabilities 2,165 1,973

Net income 2 -16

ROA* 0.02% -0.20%

ROE* 0.14% -1.15%

Loan loss reserves/loan portfolio 6.46% 8.97%

Equity/assets 17.30% 18.12%

*Annualized

Source: NBU

FIUKR 10 issue parametersYTM, %* 127.39

Price, %* 58.00

Redemption Feb 16, 2010

Amount, $mln 275

Coupon, % p.a. 9.75

Frequency S/A

*offer

Source: Bloomberg

16

C:0 M:91 Y:100 K:60

R:122 G:31 B:16

PMS 483C

C:10 M:90 Y:100 K:0

R:213 G:53 B:27

PMS 179C

C:10 M:30 Y:42 K:0

R:230 G:188 B:151



Restructuring case

Issue par value, $ mln 100

Assumed coupon rate 12.375%

Assumed amortization schedule Annual beginning in 2011

Assumed maturity 2013

NPV of cash flows on restructured bond, % of FICBUA 10 par

100%

Source: Phoenix Capital

Finance and Credit Bank (FICBUA): HOLD

In March 2009, Finance & Credit Bank (FICBUA), ranked 14th by assets in Ukraine, defaulted on its $70 mln syndicated loan, which triggered a default on its $100 mln Eurobond issue. The bank is developing a restructuring offer at the moment. According to FICB President Volodymyr Khlyvniuk, the bank intends to redeem its debt, and shareholders are ready to provide some security regarding debt repayment.

FICBUA has to date resisted disclosing its 2008 IFRS results openly. We assume its asset-quality deterioration is less significant than that of other 2nd-tier banks given that the bank’s loan portfolio mainly consists of loans to corporate clients, predominantly in export-oriented sectors (62% of its loan portfolio). The bank is no longer looking for the state to step in as it did before, but is going to try to resolve the situation itself.

Looking ahead, the bank is likely to be rescued by parent Finance & Credit Group. Given that the bank has underwritten past and ongoing payment schemes within the Group, rescuing the bank is likely very important for shareholders.

Restructuring case scenarioWe assume the terms of any restructuring offer to be largely similar to those of FIUKR, with maturity postponed by three years, coupon paying around 12.375%, capitalization of interest and adoption of an amortization schedule. This brings us a recovery rate of 100% if the coupon is capitalized.

Liquidation case scenarioA liquidation scenario looks unlikely to us in the case of Finance & Credit because it would be highly unattractive for bondholders. We estimate the recovery rate on bank Eurobonds to be 23% of par, implying 72% recovery on its retail loan portfolio and 85% recovery on its corporate loans. We should note, however, that the actual recovery rates are very likely to prove much lower.

Liquidation case

Total assets, $ mln 2,379

Assumed loans recovery, %* 86% 81% 76%

Total adjusted assets, $ mln 2,070 1,967 1,864

Total liabilities, $ mln 2,057

Eurobond recovery rate (% of par) 100% 23% 0%

* Recovery rates assumed to be similar to those for FIUKR

Source: Phoenix Capital

Public debt profileAmount,

$mln Maturity/Put

Syndicated loans 70 default

Syndicated loans 43 2009

LPN (Eurobond) 100 Jan 25, 2010

Source: Bloomberg, Loan Radar

Finance&Credit Bank financials, UAS, $mln

2008 1Q09

Total assets 2,395 2,379

Total Equity 322 322

Total Liabilities 2,073 2,057

Net income for 12 month 27 25

ROA 0.3% 0.2%

ROE 2.0% 1.8%

Loan loss reserves/loan portfolio 1.5% 4.6%

Equity/assets 13.4% 13.5%

Source: Bank

FICBUA issue parametersYTM, %* 303.13

Price, %* 38.00

Redemption Jan 25, 2010

Amount, $mln 100


Frequency S/A

*offer

Source: Bloomberg

17

C:0 M:91 Y:100 K:60

R:122 G:31 B:16

PMS 483C

C:10 M:90 Y:100 K:0

R:213 G:53 B:27

PMS 179C

C:10 M:30 Y:42 K:0

R:230 G:188 B:151



Nadra Bank (NADRA): SELL

Nadra Bank, ranked 10th by assets among Ukrainian banks, has suffered a liquidity squeeze and has to be nationalized if foreign lenders agree the debt restructuring. After a scandal about misapplication of NBU refinancing funds in late 2008, Nadra Bank fell under temporary administration and began developing its $829 mln debt restructuring offer. On June 23, 2009, the bank announced its $175 mln Eurobond restructuring terms, which are highly unfavorable to bondholders even under the most optimistic scenario.

The government will step in only if the restructuring terms are accepted (with a UAH 5.5 bln injection of equity to be directed towards repayment of individual deposits), and even this does not guarantee the bank’s survival in the long term. However, the government’s equity injection, according to the Nadra presentation, will be directed towards individual deposits repayment. We do not believe that the government would be an effective collector for the bank’s problem loans portfolio and presume Nadra will be liquidated sooner or later under state management, just as Bank Ukraina was after floundering from the late 1990s until the early 2000s. The only hope as such lies in the state selling the bank to an investor, but this looks highly doubtful at present.

Given our assumptions on restructuring and liquidation scenarios, we recommend selling the Nadra Bank Eurobond at any price higher than 11.5%.

Restructuring case scenarioOption 1. Buy-backDebtholders are offered a buy-back at 15% of par. However, Nadra has only $20 mln reserved for this transaction (we believe, assuming both accrued interest and principle repayment), while total issue volume stands at $175 mln of par. Under this scenario, one could expect to receive up to 11.5% of par in the best case (barring special treatment of particular investors, which is highly probable).

Option 2. Discounted reschedulingThis scenario assumes the write-off of 60% of par and bullet repayment in July 2015 with an interest rate of 9.25% p.a. This scenario assumes Nadra’s survival until 2015 and that it will be able to repay its debt, which is doubtful given the very poor financial condition of the bank and the fuzzy strategy disclosed in its debt restructuring presentation.

Liquidation case scenario

Bondholders are the last among ranking creditors after secured creditors, individual depositors and others. As such, the recovery rate in case of the troubled bank’s liquidation will be close to zero.

Debt profile

Amount, $mln

Trade related loans 408

Eurobond 175

Local bonds 68

Off-balance liabilities 178

NBU/ State-owned lenders 1,103

Source: Bank

Nadra Bank's balance sheet, $mln

1 Jun 2009

Cash and equivalents 70

Amounts due from banks, net 131

Loan portolio, net 2,684

Retail 1,971

Corporate 1,011

Provisions -298

Securities 135

Property, plant and equip. 228

Other assets 275

Total assets 3,522

Amounts due to NBU 1,013

Customer funds 1,249

Retail 1,068

Corporate 181

Amounts due to banks, IFIs, and other liabilities 1,040

Subordinated loans 109

Total liabilities 3,412

Total equity 110

Total liabilities and equity 3,522

Source: bank

NADRA 10 issue parametersYTM, %* -

Price, %* 13.00

Redemption Jun 28, 2010

Amount, $mln 175

Coupon, % p.a. 9.25

Frequency S/A

*bid

Source: Bloomberg

18

C:0 M:91 Y:100 K:60

R:122 G:31 B:16

PMS 483C

C:10 M:90 Y:100 K:0

R:213 G:53 B:27

PMS 179C

C:10 M:30 Y:42 K:0

R:230 G:188 B:151



Alfa Bank Ukraine (ALFAUA): Fair yield of new notes - at 60% p.a.

On July 1, 2009 Alfa Bank Ukraine, 9-th largest Ukrainian bank owned by Russian Alfa Group, announced the beginning of an exchange offer and consent solicitation for any and all of the $345 mln 9.75% LPN due 2009; the $450 million 9.25% LPN due 2010; and the $250 mln 12.00% LPN due 2011 for dollar-denominated 13.00% amortizing LPN, due 2012, to be issued by Ukraine Issuance plc and cash. Considering that the new notes should yield 60% p.a. after restructuring (assuming a premium of 3,000 bps over PRBANK 12, which could later squeeze to 1,500–2,000 bps after the restructuring is approved), we discovered a level of 61.5% BID/64.5% ASK of par for ALFAUA 09, 52.5%/55.5% of par for ALFAUA 10, and 57.17%/60.17% of par for ALFAUA 11. The exchange consideration that each holder who elects to participate in the exchange offer prior to the early exchange deadline for holders of 2009 and 2010 notes or the expiration deadline for 2011 notes holders (July 14, 2009) will receive is as follows:

• 2009 notes – for every $1,000 of 2009 notes: a cash amount of $270 and $730 principal amount of new notes;• 2010 notes – for every $1,000 of 2010 notes: a cash amount of $150 and $850 principal amount of new notes; and• 2011 notes – for every $1,000 of 2011 notes: a cash amount of $270 and $730 principal amount of new notes.

Otherwise, noteholders who exchange their existing notes after the early exchange deadline but prior to expiration (July 21, 2009 for the 2009 notes and 2010 notes holders), where applicable, or who are obliged to exchange their existing notes following exercise of the call option (assuming the proposed amendments are approved), will receive the following:

• 2009 notes – for every $1,000 of 2009 notes: $1,000 principal amount of new notes;• 2010 notes – for every $1,000 of 2010 notes: $1,000 principal amount of new notes; and• 2011 notes – for every $1,000 of 2011 notes: a cash amount of $100 and $900 principal amount of new notes.

Key terms of the new notes are as follows:Coupon: 13.00% payable quarterlyMaturity: August 2012 (three years from the issue date of the first new notes issued)Average Life: Two yearsAmortization Schedule: equal quarterly principal installments until 2012 commencing one year after the first coupon paymentMinimum Denominations: $100,000 + $1,000

ALFAUA issue parameters09 10 11

Price, % of par* 63.00 54.00 58.67

Amount, $mln 345 450 250

Coupon, % p.a. 9.75 9.25 12.00

Cash payment per 1000 of par 270 150 270

New notes principle, per 1000 of par 730 850 730

*estimated fair price, MID

Source: Bloomberg

Alfa Bank Ukraine Financials, $mln, IFRS

2007 1H2008

Total assets 2,598 3,737

Total shareholder equity

313 544

Net interest income

116 212

Net income 12 24

ROA 0.6% 0.87%

Net interest margin

6.9% 7.4%

Cost/income ratio 64.5% 58.2%

liquid assets/total assets

7.8% 8.2%

loans/deposits 268.3% 223.7%

Loan loss reserves/gross loans

1.5% 2.1%

Equity/Assets 12.0% 14.6%

Debt Securities/Equity

261.7% 214.9%

Capital adequacy ratio

16.1% n/a

Source: Bank

19

C:0 M:91 Y:100 K:60

R:122 G:31 B:16

PMS 483C

C:10 M:90 Y:100 K:0

R:213 G:53 B:27

PMS 179C

C:10 M:30 Y:42 K:0

R:230 G:188 B:151



Restructuring caseIssue par value, $ mln 175

Coupon rate (I option) 9%, paid semiannually in cash

Coupon rate (II option) 9% and then 15%, capitalized

Amortization schedule Annual beginning in 2010

Maturity 24 Nov 2014

NPV, % of XXIC par (I option) 85%

NPV, % of XXIC par (II option) 97%

Source: XXI Century, Phoenix Capital estimates

XXI Century (XXIC): BUYXXI Century, a UK-listed Ukrainian real estate developer with approximately 60 different projects in its portfolio, has recently announced its final restructuring proposal with regard to its $175 mln Eurobond issue.

The results of the ongoing talks are to be announced July 3 – this is the first Eurobond restructuring to take place among Ukrainian issuers and if it is rejected, it could become a catalyst for the prices of other Eurobond issues in default to drop. The company is currently in the process of selling off its less attractive projects in order to funnel the cash into the development of its more attractive ones and thereby ensure that the company will generate enough cash for future remaining debt repayments, if restructured.

We have chosen XXIC’s Eurobonds as our top pick among Ukrainian issues in default as it provides benefits for its bondholders in any given scenario.

Restructuring case scenarioThe restructuring terms involve two options: coupon payment in cash and capitalization of interest. Both of them offer a very high ROI, if this Eurobond is bought at its current market price. We used a discount ratio of 14.27%, which corresponds with the sovereign curve.

Under the first option, the interest rate would change from 10% to 9%, the final maturity date would be extended to Nov. 24, 2014, and an amortization schedule would be introduced. In this case, its NPV would total 88% of Eurobond par value. The second option differs by including capitalization of the interest rate and the rate changing from 10% to 9% by November 2009, and to 15% for following periods. This would imply a recovery rate of 89% of par.

We should note that this restructuring proposal was developed by Renaissance Capital, which together with ING Bank are rumored to be the main bondholders of the company. As such, the probability that this restructuring proposal will be accepted is high (we assume a 90% likelihood at this point).

Liquidation case scenarioWe believe the XXI Century Eurobonds remains a buying opportunity even if the liquidation case scenario takes shape. Based on the information we have about the company’s recent disposal of four of its projects in mid June 2009 and the disposal of its Kharkiv real estate development partnership (which was conducted in late June), we made assumptions about a fire-sale discount and conservatively evaluated the company’s current liquidation value with this in mind. According to conservative estimations, the current value of the company’s portfolio is between $97mln-204 mln assuming an asset fire sale. And the appraisal of the company's real estate portfolio as at Dec. 31, 2008, which was recently completed by CB Richard Ellis LLC, gives a figure of $474 mln.

Thus we've made estimations for three scenarios with fire-sale discounts of 95%, 87% and 79%. Our estimates showed than even a 95% discount would mean a 29% recovery rate (more than current indicative market price).

Public debt profileAmount,

$mlnMaturity/

Put

LPN (Eurobond) 175

Source: Bloomberg, Loan Radar

XXI Century projects valuation and disposal discounts

Project

$ mln, as of

30/06/08

Discount for fire

sale

Emerald - Sevastopol apartments 35.3 97%

Lisnyky 215.3 95%

Boryspil mixed-use 12.9 93%

Kvadrat-Donetsk 26.7 91%

Weighted average - 95%

Source: XXI Century

XXI Century financials, IFRS, $mln2007 1H2008

Revenues 20 15

EBIT 1,396 -68

Net income 1,380 -77

Total Assets 2,337 2,578

Total Equity 2,010 2,018


Debt/Equity 9.8% 20.8%

Source: XXI Century

XXI Century 10 issue parametersYTM, %* -

Price, %* 20.00

Redemption -

Amount, $mln 175

Coupon, % p.a. -

Frequency S/A

*offer

Source: Bloomberg

XXI Century liquidation case calculations, $mlnProperty and investments as of June 31, 2008 2269

Discount for firesale 95% 87% 79%

Current assets value with discount 113 294 474

Net liabilities 237

Left on Eurobond issue (under assumption that Eurobond holders are of the least priority among the creditors) 51 232 412

Recovery rate, % of par 29% 100% 100%

Source: XXI Century, Phoenix Capital estimates

20

C:0 M:91 Y:100 K:60

R:122 G:31 B:16

PMS 483C

C:10 M:90 Y:100 K:0

R:213 G:53 B:27

PMS 179C

C:10 M:30 Y:42 K:0

R:230 G:188 B:151



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Ukrainian Eurobond quotes, as of 01 July 2009

21

C:0 M:91 Y:100 K:60

R:122 G:31 B:16

PMS 483C

C:10 M:90 Y:100 K:0

R:213 G:53 B:27

PMS 179C

C:10 M:30 Y:42 K:0

R:230 G:188 B:151



Ukr

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BID YTM, % p.a.

Dura

tion,

yea

rs

Ukr

aine

's E

urob

ond

Yiel

d M

ap

22

C:0 M:91 Y:100 K:60

R:122 G:31 B:16

PMS 483C

C:10 M:90 Y:100 K:0

R:213 G:53 B:27

PMS 179C

C:10 M:30 Y:42 K:0

R:230 G:188 B:151



The Ukrainian Parliament has adopted a law supporting farmers. On Mar. 4, 2009, parliament deputies voted to override President Viktor Yushchenko’s veto on Law #3353, which would have helped support the Ukrainian agriculture sector. The main points of the law were:

• Export duties for sunflower seed were reduced by 1% to 13% in compliance with WTO agreements; • The State Agrarian Fund may intervene by purchasing up to 1 mln tonnes of sunflower seed to stabilize prices; • Banks will provide credits to processing enterprises to cover the purchasing cost of milk and meat by Ukrainian farmers. Banks were prevented from penalizing processing enterprises if loans became delinquent and needed to be prolonged. Banks are obliged to prolong loans attracted in the sector over 2005-2008 by one more year; • The state will compensate farmers for up to 70% of their grain storage costs; and • The land purchase moratorium would be prolonged until Jan. 1, 2010.

In order to support export-oriented industries despite tightening demand, the Ukrainian government adopted Resolution #925 dated Oct 14, 2008, in which a number of indirect subsidies were given to metallurgical and chemical enterprises through end-1Q2009. In March 2009, the terms of the Resolution were prolonged to end 1H2009. The main points of the Resolution are:

• Domestic chemical and metallurgical enterprises (including those in the steel, coke and mining sectors, but excluding tube and pipe-making plants) were released from paying the 2% markup on natural gas owed to Naftogaz Ukrainy until the resolution expires;• The Transport Ministry and the NERC were recommended not to increase railway and electricity tariffs respectively until the resolution expires. As a result, metallurgical enterprises have not seen an increase in electricity tariffs or railway transportation costs since November 2008.

The Industrial Policy Ministry estimates that the total amount of indirect subsidies given to metallurgical enterprises over October 2008-February 2009 is at least UAH 1 bln ($140 mln). Government actions, meanwhile, have helped domestic steel mills to assure operational profitability over 1Q2009. Although there is no certainty that the government will prolong the Resolution for 3Q2009, it is very likely that it will do so.

The government and the NBU are cooperating to rescue the troubled Ukrainian banking system, the main problems of which are rising NLP levels, funding outflows and undercapitalization. The most important measures have been as follows:

• On June 10, 2009, the government launched recapitalization of troubled banks starting with Ukrgazbank, Rodovid Bank and Kyiv Bank by acquiring a majority stake in each via a share capital dilution. The total amount of funds set aside in the state budget for bank recapitalization is UAH 44 bln (UAH 9.6 bln is to be spent on the three banks listed above); • On June 24, 2009, the Parliament adopted anti-crisis law #3585 on the banking sector, which includes a selective moratorium on the disposal of residential apartments, mortgage loans restructuring terms, restrictions on foreign currency lending and other; • The NBU has actively provided refinancing to banks via overnight credits and regular liquidity support tenders (up to UAH 11 bln was granted in 1Q2009, allowing banking system liquidity to surge);• The Bank has eased reserve requirements and regulations for banks that are in the process of restructuring problem loans (i.e. concerning mortgage loan restructuring and loans to industrial producers, and a change in loan currency from foreign- to hryvnia-denominated);• A moratorium on early withdrawal of retail deposits was introduced during the peak run on deposits, though this moratorium has now expired; and• Recently, the NBU’s official base rate was lowered from 12% to 11%, while actual refinancing rates were lowered by 2%, from 18%/20% to 16% for collateralized loans and 18% for blank loans.

Bailing out Ukrainian farmers

Bailing out Ukrainian metallurgy

Bailing out Ukrainian banks

Appendix 1. Anti-crisis measures summary

23

C:0 M:91 Y:100 K:60

R:122 G:31 B:16

PMS 483C

C:10 M:90 Y:100 K:0

R:213 G:53 B:27

PMS 179C

C:10 M:30 Y:42 K:0

R:230 G:188 B:151



Azovstal financials for 2004-2009, $ mln

Income Statement IFRS IFRS IFRS IFRS UAS UAS UAS

2004 2005 2006 2007 2007 2008 E2009Revenues 1,826.0 2,526.0 2,466.8 3,294.3 3,243.0 4,014.2 1,356.5

COGS -1,546.3 -2,229.7 -2,098.4 -2,717.0 -2,481.0 -3,318.9 -1,151.7

Gross profit 279.6 296.3 368.4 577.2 762.1 695.3 204.8Net operating expense -16.2 -116.2 -141.0 -130.5 -224.4 -198.1 -60.8

Operating profit 263.4 180.2 227.4 446.7 537.7 497.2 144.1

EBITDA 318.8 270.5 343.2 558.4 595.1 571.0 189.1

Net profit 204.7 119.1 138.6 348.5 420.3 370.3 100.3

Margins

gross 15.31% 11.73% 14.94% 17.52% 23.50% 17.32% 15.10%

operational 14.43% 7.13% 9.22% 13.56% 16.58% 12.39% 10.62%

EBITDA 17.46% 10.71% 13.91% 16.95% 18.35% 14.22% 13.94%

net 11.21% 4.72% 5.62% 10.58% 12.96% 9.23% 7.39%

Balance Sheet IFRS IFRS IFRS IFRS UAS UAS UAS

2004 2005 2006 2007 2007 2008 E2009Cash and equivalents 50.0 237.9 34.1 76.2 84.3 66.3 31.1

Other current assets 542.9 668.5 1,030.5 1,333.1 1,422.8 1,733.5 747.1

Non-current assets 1,205.4 1,407.6 1,562.0 2,205.1 1,026.7 689.3 456.9

Total assets 1,798.3 2,314.0 2,626.7 3,614.5 2,533.8 2,489.1 1,235.1

Short-term debt 62.0 144.2 69.3 55.4 50.4 1.6 0.5

Other current liabilities 363.3 361.4 288.3 430.9 454.9 1,011.8 294.0

Long-term debt 115.3 41.9 274.0 179.0 175.0 175.0 175.0

Other non-current liabilities 145.1 193.7 169.9 278.8 5.4 1.7 0.0

Total liabilities 685.7 741.2 801.5 944.2 685.7 1,190.1 469.5

Shareholders' equity 1,112.6 1,572.8 1,825.2 2,670.3 1,848.1 1,298.6 778.1

Debt IFRS IFRS IFRS IFRS UAS UAS UAS

2004 2005 2006 2007 2007 2008 E2009Financial debt 177.3 186.1 343.4 234.5 225.4 176.6 175.5

Share of short-term debt 35.0% 77.5% 20.2% 23.6% 22.4% 0.9% 0.3%

Net debt 127.4 -51.8 309.2 158.2 141.1 110.3 144.4

Net interest expences 12.8 2.3 22.7 15.0 4.1 114.1 17.4

Ratios IFRS IFRS IFRS IFRS UAS UAS UAS

2004 2005 2006 2007 2007 2008 E2009Debt/EBITDA 0.56 0.69 1.00 0.42 0.38 0.31 0.93

Net debt/EBITDA 0.40 -0.19 0.90 0.28 0.24 0.19 0.76

Revenues/Financial debt 10.30 13.57 7.18 14.05 14.39 22.73 7.73

Financial debt/Assets 0.10 0.08 0.13 0.06 0.09 0.07 0.14

Financial debt/Equity 0.16 0.12 0.19 0.09 0.12 0.14 0.23

EBITDA / Net interest expense 24.83 119.50 15.13 37.11 145.62 5.01 10.85

Liquidity ratio 139% 176% 298% 290% 298% 178% 264%

Sources: Company, Phoenix Capital estimations

Appendix 2. TOP ideas. Companies' financials

24

C:0 M:91 Y:100 K:60

R:122 G:31 B:16

PMS 483C

C:10 M:90 Y:100 K:0

R:213 G:53 B:27

PMS 179C

C:10 M:30 Y:42 K:0

R:230 G:188 B:151



Naftogaz financials, $ mln

Income statement IFRS UAS UAS UAS

2007 20072007

(restated) 2008 Comments

Revenues 6,025 3,421 4,265 9,587Revenues and COGS increased in 2008 due to increase

in imported gas sales. Revenues, taxes and COGS were restated for FY2007.

Gross profit 925 782 695 -235

In 2008, Naftogaz sustained negative gross income due to the difference between imported gas price

and domestic tariffs (the Ukrainian government later compensated Naftogaz for the difference).

Net operational expenses -398 -127 -2,313 3,510 In 2007, other operating expenses were restated (increased by $2,189 mln to $4,557 mln) and other expenses

were restated (+$593 mln to $605 mln). We believe the restatements regard budget payments. In 2008, Naftogaz

reported a gross loss, compensated by higher other operating income (likely received as subsidies paid in by the

government).

Operational profit 527 656 -1,618 3,275

Net profit -13 619 -2,393 2,211

Gross margin 15.36% 22.87% 16.30% -2.45%

Net margin -0.22% 18.08% -56.11% 23.06%

Balance sheet IFRS UAS UAS UAS

2007 2007 2007 (restated) 2008 Comments

Cash and equivalents 116 82 82 261

Total assets 21,513 8,958 9,763 9,441 In 2007, receivables on internal payments were restated (+$797 mln to $2,753 mln).

Total liabilities 10,235 5,295 9,111 7,299In 2007, payables were restated (+$846 mln to $1,099

mln) and amounts due to the state were restated (+$3,031 mln to $3,417 mln).

Shareholders' equity 11,298 3,663 651 2,142Shareholders' equity was restated in 2007 following

restatement of net profit for the year (- $3,011 mln in accumulated profits)

Financial debt 2,549 2,189 2,189 4,496 -

Short-term debt 685 147 147 2,542 In 2008, financial debt increased following receipt of several large short-term loans from various,

mainly state-owned, banks (media reports debt to Oshchadbank stands at UAH18 bln or $2.3 bln).

Long-term debt 1,864 2,042 2,042 1,953

Share of short-term debt 26.90% 6.70% 6.70% 56.60%

Source: State Securities and Stock Market Comission, Phoenix-Capital

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PMS 179C

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R:230 G:188 B:151



Privatbank Financial Results, $mln, IFRSBalance sheet

2006 2007 1H2008Total assets 6,738 11,143 14,470Cash and balances with NBU 765 1,575 2,691Due from banks 121 263 278Loans to customers 5,340 8,529 10,816Loan loss reserves 429 556 675Impaired loans 308 158 310Total shareholder equity 643 1,070 1,600Total liabilities 6,095 10,072 12,870Due to banks 845 1,236 1,450Customers' accounts 4,695 7,129 9,623Debt securities and subordinated debt 367 1,445 1,497Income Statement

2006 2007 2007Net interest income 470 795 1,066Net fee and commission income 189 260 272Net income 122 222 351Ratios

2006 2007 2007Return on average assets 2.15% 2.49% 3.00%Return on equity 23.99% 25.93% 25.90%Cost/income ratio 61.52% 59.75% 60.80%liquid assets/total assets 19.52% 17.10% 18.60%loans/deposits 111.08% 125.62% 112.39%Impaired loans/gross loans 5.34% 1.74% 2.70%Loan loss reserves/gross loans 7.44% 6.12% 5.87%Loan loss reserves/NPLs 139.27% 351.69% 217.57%Equity/Assets 9.54% 9.61% 11.06%Debt Securities/Equity 56.99% 134.96% 93.57%Capital adequacy ratio 12.80% 13.50% 14.10%Source: Bank

26

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PMS 179C

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R:230 G:188 B:151



UkrSibbank Financial Results, $mln, IFRSBalance sheet

2005 2006 2007Total assets 2,163 4,360 7,261Cash and balances with NBU 196 325 520Due from banks 67 66 206Loans to customers 1,536 3,576 6,026Loan loss reserves 55 102 166Impaired loans 40 57 122Total shareholder equity 189 395 637Total liabilities 1,975 3,965 6,624Due to banks 222 1,329 2,540Customers' accounts 1,056 1,297 2,303Debt securities and subordinated debt 655 1,229 1,639Income Statement

2005 2006 2007Net interest income 58 138 267Net fee and commission income 22 67 77Net income 9 8 70Ratios

2005 2006 2007Return on average assets 0.58% 0.25% 1.21%Return on equity 5.67% 2.75% 13.65%Net interest margin 1.94% 4.98% 5.22%

Cost/income ratio 86.73% 70.37% 63.09%liquid assets/total assets 53.27% 14.57% 12.28%loans/deposits 139.79% 224.00% 274.23%Impaired loans/gross loans 2.49% 1.55% 1.97%Loan loss reserves/gross loans 3.43% 2.78% 2.67%Loan loss reserves/NPLs 137.85% 179.56% 135.62%Equity/Assets 8.72% 9.07% 8.78%Debt Securities/Equity 347.28% 310.77% 257.14%Capital adequacy ratio 11.50% 12.50% 12.70%Source: Bank

27

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PMS 179C

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R:230 G:188 B:151



VAB Bank's financial results, $mln, IFRSBalance sheet

2006 2007 2008Total assets 731 1,211 928Cash and balances with NBU 149 199 88Due from banks 0 1 2Loans to customers 502 893 759Loan loss reserves 13 18 50NPLs* 9 15 76Total shareholder equity 102 123 103Total liabilities 629 1,088 825Due to banks 132 172 112Deposits and customers' accounts 492 738 503Debt securities issued and subordinated debt 4 153 133Income statement

2006 2007 2008Net interest income 25 37 77Net fee and commission income 9 16 19Net income 2 2 -12Ratios

2006 2007 2008Return on average assets 0.35% 0.18% negReturn on average equity 2.67% 1.59% negNet interest margin 6.24% 4.94% 8.78%

Cost/income ratio 76.45% 88.91% 68.88%Liquid assets/total assets 29.10% 17.96% 13.53%Loans/deposits 100.22% 116.01% 138.59%NPL*/gross loans 1.70% 1.67% 9.35%Loan loss reserves/gross loans 2.56% 1.97% 6.14%Loan loss reserves/NPLs 150.29% 117.89% 65.69%Equity/assets 13.97% 10.13% 11.12%Debt securities and subordinated debt/equity 3.55% 141.57% 148.48%Capital adequacy ratio 15.00% 16.00% 116.00%* Loans individually determined to be impaired

Source: Bank

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PMS 179C

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R:230 G:188 B:151



XXI Century financials, $mln, IFRS

Balance Sheet 2005 2006 2007 6M2008

Current Assets 144 65 129 312Cash & Equivalents 128 16 17 175Trade Receivables 2 4 11 9Inventories 8 21 78 98Other Current Assets 6 25 23 32Fixed Assets 161 506 2209 2266PP&E, net 123 454 2049 2179Other Fixed Assets 38 53 159 87Total Assets 305 571 2337 2578Shareholders' Equity 247 531 2010 2018Par Capital 0 0 0 0Reserves and Other 240 527 2136 2151Retained Earnings 7 3 -126 -134Current Liabilities 16 21 90 250ST Interest Bearing Debt 1 0 0 158Trade Payables 15 1 31 39Other Current Liabilities 0 19 59 54LT Liabilities 42 20 237 310LT Interest Bearing Debt 8 0 197 262Other LT Liabilities 34 20 41 47Total Liabilities & Equity 305 571 2337 2578Income statement

2005 2006 2007 1H2008Net Revenues 7 13 20 15Growth, % yoy 31% 77% 60%Cost of Sales -3 -1 -2 -1Gross Profit 4 12 19 13SG&A -5 -10 -22 -14Other Operating Income/Costs, net 1 5 49 -1Increase in fair value of investment property 132 159 1351 -66Profit/(loss) from operations 132 165 1396 -68PBT 137 167 1379 75Tax -34 30 1 2Net income 103 197 1380 -77Source: XXI Century, Phoenix Capital estimates

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PMS 179C

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R:230 G:188 B:151



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C:10 M:90 Y:100 K:0

R:213 G:53 B:27

PMS 179C

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R:230 G:188 B:151



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