You're reading: Experts: Declaring Ukraine in partial default, Fitch ‘just stated a fact’

Fitch Ratings’ downgrading of Ukraine’s foreign-currency rating to “restricted default” was an expected move that won’t affect the state’s economic and social life, experts say.


Fitch on Oct. 6
declared Ukraine to be in partial default on $500 million in eurobond
obligations after the country missed a payment scheduled for Sept. 23. The
announcement came a week before Ukraine’s scheduled negotiations with
international creditors.

“The 10-day grace
period on Ukraine’s $ 500 million eurobond maturing on Sept.23, 2015 has
elapsed without payment being made. Fitch therefore judges Ukraine to be in
default on its sovereign eurobond obligations,” the agency stated.

In August, Ukraine
sealed a deal with international creditors on restructuring the government’s
$18 billion debt, which was later approved by parliament on Sept. 17 with more
than 300 lawmakers voting in favor. The deal will save Ukraine at least $3.6
billion, based on a 20 percent write-down of Ukraine’s Eurobonds. It also
postpones until 2019 Ukraine’s debt repayments to a group of foreign
bondholders led by U.S. asset manager Franklin Templeton, who hold over $7
billion worth of Ukraine’s bonds.

Restructuring
foresees an exchange of old bonds for newly issued ones, with higher interest
of 7.75 percent and maturity dates starting from 2019.

According to
Oleksandr Paraschiy, an analyst at Concorde Capital, what Fitch called default
was indeed a non-payment, but it had been planned and negotiated with the
majority of the parties.

Fitch just “stated
a fact,” Paraschiy said.

“And the fact is
that the long-term papers are in factual default. A moratorium has been set on
any payments, as the procedure of debt restructuring is ongoing,” Paraschiy
told the Kyiv Post.

Nomura
International economist Timothy Ash agreed: “This was more or less as expected
after Ukraine moved to restructure its private sector external debt
liabilities.”

“It is a default,
so will count against Ukraine going forward – people will remember that
ultimately it did not pay, and its credit rating will suffer as a result.
However, I think there are ‘hard’ and ‘soft’ defaults/restructurings. This is a
‘soft’ default/restructuring,” Ash told the Kyiv Post.

A “hard” version of
default could have happened if Kyiv had unilaterally applied a moratorium on
external payments, according to Yegor Perelygin, the head of the strategic
planning department in UniCredit Bank Ukraine.

“But a full-scale
default didn’t happen, and we really did manage to avoid the worst scenario,”
Perelygin told the Kyiv Post. So Fitch’s announcement won’t influence either
the exchange rate or the lives of Ukrainians, he said.

According to Ash,
“the period of the default could prove short lived.”

“Once the
restructuring is completed, I think that Ukraine’s ratings could move back
quite quickly to say a CCC rating, and then gradually move higher,” he told the
Kyiv Post.

As was stated in
Fitch’s report, “Ukraine’s ratings will be upgraded shortly after Fitch
determines that the exchange has been successful. The new rating will be consistent
with Ukraine’s prospective credit profile and debt structure.”

However, not all
foreign creditors are happy with the conditions. Russia, second largest
Ukraine’s bondholder with $3 billion in bonds, did not take part in months of
debt restructuring talks, and has refused to accept the general terms reached
by negotiators. Ukraine, in turn, sees no reason to apply any special
conditions to the Russian credit.

The Russian
government insists that the bonds it bought from Ukraine in 2013 are a sovereign,
not a private debt, therefore Russia refuses to accept the general conditions
Ukraine has negotiated with other bond holders, Paraschiy said.

“The IMF can’t keep
providing loans to countries that failed to pay the state debt,” he told the
Kyiv Post. “However, the position of IMF isn’t clear yet, as it hasn’t
confirmed that this is Ukraine’s state debt.

“This is a
political issue. Clearly, Russia will be pressuring the IMF. Much will depend
on the IMF.”

Nikolay
Gueorguiev, the chief of the IMF mission in Ukraine, on Oct.2 encouraged the
broad participation of eurobond holders in the debt exchange, which the fund
believes will ensure that public debt is sustainable with high probability and
that the IMF program remains fully financed.

Represented by
international law firm Shearman & Sterling, a group of investors owning at
least 25 percent of the $500 million Ukrainian Eurobond issue that expired
Sept. 23 has long been seeking better conditions, and at various points
threatened to block the whole deal.

Ukraine’s Finance
Ministry will meet all creditors in London on Oct.14 for negotiations, when
final consensus on conditions and technicalities is to be reached.

Illya Neskhodovsky
of the Reanimation Package of Reform, a civic platform for non-governmental organizations
and experts, told the Kyiv Post if the negotiations reach a dead end, Ukraine
might face bankruptcy. However, he added, the risk of this is low.

“(The international
creditors) understand Ukraine’s proposals, and realize that the start of bankruptcy
procedures would only worsen the situation with their bonds, so they will have
to accept (Ukraine’s conditions).”

Kyiv Post staff writers Alyona Zhuk and Olena
Gordiienko can be reached at
[email protected] and [email protected]