You're reading: $3 billion Russian bond status still fuzzy as Ukraine creditors reportedly accept 20 percent haircut

Ukraine has secured a 20 percent writedown on principal payments for $19 billion of its publicly traded eurobonds, Dow Jones Newswires and Bloomberg reported on Aug. 24, citing unnamed sources.

The news signals that Ukraine is close to sealing a $15.3 billion sovereign
debt restructuring deal with its largest creditors, Kyiv-based Dragon Capital
said in an emailed statement on Aug. 25. The so-called haircut is part of
Ukraine’s goal of meeting requirements by institutional lenders to secure $40
billion in lending over the next four years, including a $17.5 billion bailout from
the International Monetary Fund. Kyiv has received about $6.7 billion from the IMF
under the current lending program approved in March.


The savings would help the country rebuild its decimated economy and
infrastructure, ravaged by Russia’s undeclared war against Ukraine since
mid-April 2014. Ukraine has since December 2013 seen inflation reach 60
percent and the size of its economy plunge by 28 percent to $132 billion as of
Aug. 19.


Representing the Ukrainian government in debt restructuring talks with international
commercial creditors, Ukraine’s Finance Ministry said negotiations are still
underway.


“There is no agreement yet, negotiations are still going on to meet the
International Monetary Fund targets. The government of Ukraine has taken no
decision and all options remain on the table,” the Finance Ministry said in an
emailed comment to the Kyiv Post.


The creditors’ committee, holding about $8.9 billion of Ukraine’s
outstanding debt and led by the nation’s largest private creditor Franklin
Templeton Investments, declined to comment in an emailed response to the Kyiv
Post.


New coupon rates and bond maturity extensions are also expected as part
of the debt restructuring deal.


Ukraine, under IMF bailout requirements, must also bring its public and
publicly guaranteed debt to less than 71 percent of gross domestic product by
2020. The government must also keep the state budget’s gross financing needs at
an average of 10 percent of GDP in 2019-2025, not exceeding 12 percent of GDP
in any given year.


Parliament in May gave the government the authority to suspend payments
on certain external sovereign and sovereign-guaranteed debt in case talks with
creditors break down.


Ukraine
overnight made a $60 million coupon payment on a $1.5 billion eurobond
due in February 2021, Bloomberg reported, citing three traders who asked
not to be identified because they weren’t authorized to speak publicly.

“Ukraine’s latest coupon payment also signals that talks are
progressing,” according to Dragon Capital. “We think that both sides are trying
to avoid the negative scenario of a debt moratorium while seeking to get as
much as possible from the talks. The ultimate impact of the restructuring
negotiations on market prices would also depend on other restructuring
parameters including new coupon rates, maturities and potential warrants linked
to future GDP dynamics.”

Currently,
it is “impossible for Ukraine” to pay in full its $500 million sovereign bond
expiring on Sept. 23, Bloomberg reported, citing a person with knowledge of the
negotiations who also asked not to be identified because details are private.

Apart from a $600
million bond maturing on Oct. 13, a huge question mark looms over a $3 billion
Russian security expiring on Dec. 20 that disgraced ex-President Viktor
Yanukovych’s government borrowed one month before he abandoned office in
February 2014.

Moscow has so far
rejected Ukraine’s proposal to enter into discussions regarding the eurobond.

“I
think it is very unlikely that Russia will play ball with the current
restructuring – albeit the Ukrainian side are trying to roll these into the
pending private sector agreement,” Timothy Ash of Nomura International said in
an emailed note on Aug. 25. “Moscow is unlikely to participate… and (will) then
call Ukraine into arrears… early next year, (and) as these bonds inevitably
move into arrears, IMF shareholders will have to make a call whether they are
willing to continue to lend to Ukraine with official arrears outstanding.”

The
IMF has been vague about the status of the Russian bonds. The Washington
D.C.-based lender’s envoy to Ukraine,
Nikolay
Gueorguiev, said in an Aug. 4 conference call that the IMF executive board has
yet to discuss the matter.

“We don’t have specific assumptions about
any of the designs of operations… There is time, Ukraine is not in arrears to
anybody now, and the financial assurances can be met in a number of ways,”
Gueorguiev added.

Kyiv Post editor Mark
Rachkevych can be reached at
[email protected].