Citi Shuns Ukraine GDP Warrants With Fair-to-Rich Valuation


Citigroup Inc. is warning against getting too excited about an obscure credit derivative that’s won a following among traders due to its potential for outsize returns.

Ukraine’s GDP warrants, which hand investors a payment if the country’s growth surpasses certain threshold, may not have much room to rally further, according to strategist Dumitru Vicol, who says their fair value is on par or below current price levels.

Citi Shuns Ukraine GDP Warrants With Fair-to-Rich Valuation

The securities, issued as part of Ukraine’s 2015 debt restructuring, may be worth about 112.4 cents when measuring future payments with a 6.3% discount rate, or even lower at 101.8 cents assuming the yield implied by the country’s government bonds. The warrants have rallied 25 cents to 111.9 cents since the end of October, but some analysts predict potential for further gains to as high as 190 cents.

Most of that optimism is based on estimates that an economic rebound this year from the coronavirus pandemic may trigger a one-time payment of as much as 35 cents per warrant. Further coupons may follow depending on the growth path until the debt instrument’s maturity in 2040. Investors are set to receive an initial, small payment based on 2019 annual growth in 2021.

READ: Buyers of Obscure Ukraine Warrants Await $1 Billion Jackpot

Citi, however, is staying cautious amid a risk of “sizeable points of pressure in the coming months,” including a delay in an International Monetary Fund loan agreement and further foreign debt issuance.

“Ukraine GDP warrants do not flag as super-attractive assets,” London-based strategist Vicol said in an emailed note. “The current market value of warrants appears to be in a ‘fair-to-rich’ price range.”

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