Kernel ends Ukraine bond drought, but don't expect issuance rush

* Kernel $500 mln deal ends Ukraine issuance drought

* Most other companies could struggle to draw investors

* Ukraine hit by secessionist war, sluggish economy

* Kernel has low debt, no exposure to war-torn east

By Karin Strohecker and Natalia Zinets

LONDON/KIEV, Jan 27 (Reuters) - Sunflower oil producer Kernel ended Ukraine's corporate bond issuance drought this week with a $500 million deal. But other firms are unlikely to receive such a warm welcome from investors due to high debts, a secessionist war and a frail economy.

Kernel's debut deal, the first from a Ukrainian firm since 2013, drew investor bids for almost three times that amount as investors raced to snap up high-yielding emerging bonds.

But this is unlikely to herald a Ukrainian issuance rush as the world's largest producer and exporter of sunflower oil stands out in the country's corporate landscape; it has lower debts than most firms and the bulk of its profits come from exports, so its business is built on hard currency.

It is also a leading light of the traditionally successful agribusiness industry in Ukraine - dubbed the "the breadbasket of Europe" and home to highly fertile black soil. Most agribusiness land is in the west of the country, so has been less affected by the conflict in eastern regions than other sectors, particularly mining and heavy industry.

The economy of the ex-Soviet state is just starting to recover following sharp contractions in 2014 and 2015, triggered by violent protests, Russia's annexation of its Crimea region, the war in the east, as well as years of mismanagement.

The government restructured its debt in 2015 with the help of an International Monetary Fund bailout. A wave of corporate restructurings followed: from steel giant Metinvest and Ukrainian Railway to First Ukrainian International Bank.

"The hurdle is still relatively high for the quality of the Ukrainian corporates if they want to access the international debt market. Kernel made the cut, but there may not be so many private companies which can do so," said Oleksiy Soroka, portfolio manager for emerging market debt at Allianz Global Investors in London.

CRIMEA EXPOSURE

Warsaw-listed Kernel Holding has one of the lowest debt burdens of Ukrainian companies. Net (LSE: 0LN0.L - news) debt to earnings before interest, taxes, depreciation and amortization (EBITDA) stood at 0.8 times at the end of its full financial year 2016.

That is low even among the few Ukrainian firms that have continued servicing their debt. Poultry producer MHP, for example, reported a ratio of 2.93 times for net debt to EBITDA for the 12 months to June last year.

Kernel also has no exposure to eastern regions and the Crimean peninsula, unlike many Ukrainian industrial firms. Even (Taiwan OTC: 6436.TWO - news) in its own sector, it is well positioned; agricultural group Ukrlandfarming said in April last year that the damage due to loss of assets in Crimea and the eastern Donbass region amounted to as much as $300 million.

Kernel told investors in its bond statement that nearly 90 percent of its EBITDA in the past five years came from exports, securing an assured income stream in hard currency.

Its bond is rated B+ by ratings agency Fitch, two notches above its B- rating on Ukraine's sovereign debt.

"The market is ready for other borrowers also, but in Ukraine there are simply not companies which could enter the market - except one or two," said Sergiy Fursa from the fixed income sales team of Dragon Capital (Other OTC: DRGV - news) , one of Ukraine's largest investment banks.

BUMPER HARVEST

Ukraine is one of the three top global grain exporters. The 2016 grain harvest was expected to be high and exports were seen hitting a record.

Central Bank Deputy Governor Dmytro Sologub said he expected more issuance from the agricultural sector.

"There is potential for an increase in external borrowing. I can't say there will many such companies," Sologub told journalists. "Agriculture looks the most promising as a whole."

Igor Mazepa, chief executive at Concorde Capital, said there were "some good signs that Ukrainian companies may go out to international markets", though usually corporate issuance would follow a sovereign sale, which may happen later in the year.

MHP is one of those that can hope to tap international markets, investment company Concorde Capital reckons.

Another candidate, according to Concorde, is London-listed iron ore miner Ferrexpo (Other OTC: FEEXF - news) , which is considering a $750 million Eurobond. Ferrexpo, which reported earlier in January that rising sales in 2016 had taken production volumes to record levels, has a Eurobond due for repayment in 2019 which currently yields around 7.7 percent.

And the economy turning a corner after contracting by nearly 10 percent in 2015 should help rekindle investors' appetite.

"Demand for high-yield financial instruments denominated in U.S. dollars appears as soon as a country shows signs of economic recovery after deep recession," said Oleksandr Valchyshen, head of research at ICU investment bank in Kiev.

The central bank said on Thursday it expected the economy expanded by 1.8 percent in 2016 and upped its growth forecast for 2017 to 2.8 percent from 2.5 percent.

But this will take a while to filter through to companies' balance sheets. While most are yet to release full-year results for 2016, data for the first nine months showed many continue to struggle and post losses. (Writing by Karin Strohecker; Editing by Pravin Char)