Ukraine lays the golden egg for Bank of America

IFR 2315 - 11 Jan 2020 - 17 Jan 2020
5 min read
EMEA, Emerging Markets
Robert Hogg

Fixed-income traders covering Ukraine at Bank of America are on course for a hefty bonus after making a huge profit by backing one of the best performing assets of 2019.

The US bank's CEEMEA desk in London booked a profit of at least US$60m (and possibly significantly more), according to market sources, largely thanks to a spectacular rally in the prices of Ukraine's sovereign bonds and GDP-linked warrants.

Sources say the strategy was led by trader Gerald Mimoun, who one rival trader described as the "go-to man for Ukraine".

The money made by Bank of America's desk dwarfs the US$15m or so of profit traders would typically consider as a good year. Given the exceptional outcome, Mimoun and his colleagues could be on course for a seven-figure bonus, subject to strict EU pay rules.

Historically, traders were paid for their efforts with a bonus cheque reflecting 6%-8% of profits.

That prospective payout, however, has been dulled by EU regulations. The EU has capped bonuses since 2014 to no more than base salary, or double that amount with shareholder approval.

Filings registered with Companies House show Mimoun listed as a managing director at Bank of America. The base salary for a managing director in trading would be around £200,000-£350,000, according to one headhunter, although allowances on top of that can boost the potential bonus.

"They can find ways around these things, like giving you a ridiculous salary," said a second trader at a rival firm. "The only problem then is if things go wrong the next year."


Ukrainian assets jumped in value in 2019 with political circumstances proving a huge boon for investors and traders, especially the election in April of former comic Volodymyr Zelensky as president on an anti-corruption ticket.

And even though questions have since arisen about the president's links to oligarch Ihor Kolomoisky and their impact on a potential IMF agreement, Ukrainian assets are still rallying.

The yield on the sovereign's September 2027 bonds, for example, fell by nearly 500bp over the course of 2019 after starting the year bid at 10.80% and finishing it at 6.18%. They are now quoted at 5.70%, according to Refinitiv.

At the same time, the sovereign's GDP-linked warrants have soared in value amid hopes that the government will repurchase them to prevent big future payments, which potentially start in 2021 and will be uncapped after 2025.

Ukraine tossed in US$3.6bn in GDP warrants – bonds indexed to economic growth – in its 2015 restructuring after it forced investors to write off 20% of the value of their original holdings. They are quoted at a cash price of 98, compared with 57 at the start of 2019, according to Tradeweb.

"I would speculate a good chunk of performance is off a position - whether warrants or bonds - that [Mimoun] ran most of the year, and a lesser amount trading with a client," said a third rival trader.


Mimoun prospered from Franklin Templeton unloading its Ukraine warrants, according to a fourth rival trader.

The investment firm, which had spearheaded the bondholder group during Ukraine's restructuring, unwound its position in the securities in the second quarter of the year.

Although the warrants have been a popular trade for some time, Mimoun was well set up to build a position and take advantage of their soaring value.

"I'm not sure I would say he cornered Ukraine but he is probably the market leader," said the third trader, who thought most of the profit would have been booked by now.

"So much of the value is out and he would be tempting fate to be running a big position now."


The first rival trader agreed that Mimoun is a central figure in trading Ukraine hard currency fixed-income securities.

"He does a lot of flow and had a lot of warrants on his book," he said. "When you are the go-to man for Ukraine and people are wanting to trade ridiculous sizes, then your day-to-day trading is very good." He reckoned that Mimoun was trading US$100m tickets.

To give some context on the sort of returns these trades can generate, the trader said a 30-point increase on a US$30m holding on the GDP warrants generates a US$9m profit.

Although running big positions in risky assets can be very capital intensive, some banks have greater leeway.

"The banks don't want to stop traders from trading and want to facilitate the big tickets, which is where you make money," said the trader.

Bank of America declined to comment. Mimoun could not be reached for comment.