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. Last Updated: 07/27/2016

Alfa's Ukrainian Unit Blames Central Bank

KIEV -- ZAO Alfa-Bank, the Ukrainian lending unit of billionaire Mikhail Fridman's Alfa Group, blamed Central Bank currency restrictions for its failure to make a payment to bondholders.

The bank missed a payment on $100 million of bonds due May 4 because of "a lack of U.S. dollars supply in the Ukraine interbank market as well as from recent restrictions by the National Bank of Ukraine" in the market, Yulia Yevtushenko, a spokeswoman for Kiev-based Alfa-Bank, said in an e-mail.

"If this situation persists, there is a threat that other companies may not be able to fulfill their debt obligations as well," said Nikolai Podguzov, a fixed-income analyst at Renaissance Capital. "The regulators have put such conditions in place that it is impossible to buy foreign currency even if one is ready to make debt payments."

The International Monetary Fund pledged $2.8 billion by mid-May as part of a $16.4 billion bailout to shore up Ukraine's economy. Restrictions on foreign-currency trading that were intended to arrest a 41 percent slump in the hryvna now pose the risk of a "systemic problem" if borrowers cannot access dollars to repay debt, according to Commerzbank.

Ukrainian banks and companies need to repay about $10 billion in foreign debt by the end of June, Renaissance Capital said. Alfa-Bank Ukraine has $882 million of dollar and hryvna bonds outstanding, Bloomberg data show.

Policymakers banned trading currencies for future settlement and required banks seeking dollars and other currencies to prove that the money is being used to repay loans that were converted into hryvna when they were originally received.

Alfa-Bank is "taking active steps" to buy the dollars needed to make the required payment in full within five business days, the bond's grace period, and expects to do so, Yevtushenko said.

The bank will likely swap hryvna for dollars directly with the Central Bank or receive support from Moscow-based Alfa Bank, said Luis Costa, emerging-market debt strategist at Commerzbank in London.

The lender may also need to find dollars to repay $250 million of bonds Aug. 11, when investors have the option to redeem securities that are due 2011, he said.

"This is only Chapter 1," Costa said. "Chapter 2 is the putable bond, which is going to be a major checking point for the credit."

The price of Alfa-Bank Ukraine's 2011 bonds dropped about 4 cents Wednesday to 66.75 cents in the dollar, the lowest in more than six weeks, according to Bloomberg data.

"If there is a bottleneck in the interbank market, investors would have to go back to every single dollar maturity coming over the next six months and reprice the risk," Costa said. "We don't want to get to this point."