Ukraine’s government failed to agree on new GDP-warrants’ restructuring terms with their holders, which include Aurelius Capital Management LP and VR Capital Group, Bloomberg reported.
GDP warrants, or value recovery instruments (VRI), are a type of sovereign financial instrument where creditors get interest based on the success of the economy (GDP growth). The GDP warrants were issued during Ukraine’s 2015 debt restructuring.
The total volume of Ukraine’s debt in GDP-warrants is worth $3.2 billion.
Ukraine offered creditors two options, one of which included a full exchange for sovereign bonds. GDP warrants holders “were willing to restructure only the May payment, demanding more than $400 million in cash and the conversion of more than $200 million into new bonds,” Bloomberg wrote.
The creditor committee did not agree that the wholesale restructuring of GDP warrants is appropriate or necessary, Bloomberg wrote.
GDP warrants were designed for a world that no longer exists
Ukraine’s Ministry of Finance’s approach is more direct.
“The GDP warrants were designed for a world that no longer exists,” Minister of Finance of Ukraine Sergii Marchenko is quoted in the press release issued by the government.
Before the war, Ukraine should have paid GDP-warrant holders if Ukraine’s real GDP grew by more than 3%. This should have been a “payment for the economy’s growth.”
But instead, Ukraine’s economy suffered a setback. Russia’s invasion of Ukraine caused a GDP drop in 28.8% in 2022 – the GDP recovered by 5.5% in 2023. But it’s a growth caused by returning to normal after the fall, not because Ukraine’s economy accelerated in its potential.
The total cost of reconstruction and recovery after Russia’s full-scale invasion of Ukraine, over the next decade will cost the Ukrainian economy $524 billion – approximately 2.8 times Ukraine’s estimated nominal GDP for 2024, Kyiv Post previously wrote.
“The damage caused by Russia’s unprovoked and unjustified military aggression against Ukraine has been immense and unprecedented … Ukraine’s modest economic growth in 2023 was not a sign of surging prosperity but a fragile rebound from a nearly 30% downturn caused by Russia’s full-scale invasion. These financial instruments must not become an obstacle to our recovery,” Marchenko is quoted.
Ukraine’s Ministry of Finance wants a “fair and comprehensive solution” in GDP warrants negotiations. Ukraine’s government is “fully committed to constructive engagement with investors,” Marchenko said.
Ukraine held talks with the holders between April 15 and April 23.
But the April negotiations are only a climax of previous communication Ukraine’s government has started before October 2024, according to the International Monetary Fund’s Memorandum about the Fifth Review of IMF-Ukraine Extended Fund Facility Program.
GDP warrants price reaction
Bloomberg reported GDP warrants price dropped to as low as 69.5 cents on the dollar from 88 cents in February and 73 cents on Wednesday. The prices dropped as a response to the news.
“Ukraine’s dollar bonds were the bottom performers among emerging-market peers, according to data compiled by Bloomberg. The zero-coupon 2035 note fell 1.8 cents to 51.3 cents on the dollar,” the media outlet wrote.
Previously, in summer last year, Ukraine reached a deal that helped the country ease the debt burden – private creditors and the government reached a compromise to rewrite conditions for $20 billion of debt in Ukraine’s Eurobonds.
Thanks to the deal, Ukraine expects to save $11.4 billion over the next three years by a combination of lower coupons and maturity extensions, the Ministry of Finance said on Monday, July 22.
The success was reached after the second round of negotiations – no one was holding their breath for a possible deal after the first one. The proposals from the government differed a lot from what bondholders wanted.