Published: February 8, 2016
Ukraine strikes debt restructuring deal
Ukraine’s Ministry of Finance announced it had completed the country’s debt restructuring of around US$15bn with creditors – 13 series of sovereign and sovereign guaranteed eurobonds. It is still trying to find a debt solution on a US$3bn eurobond with Russia.
“Today, we close one important chapter in Ukraine’s economic history and open another. Few thought we would get to this point when we launched this process eight months ago. The successful conclusion of our debt restructuring process, completed while avoiding default, leaves Ukraine’s economy in a much stronger position and is an important prerequisite for our return to growth,” Ukrainian Finance Minister Natalie Jaresko said.
Some US$15bn of Ukraine’s external debt has been restructured, achieving a 20% debt reduction, that is around US$3bn. Hence Ukraine will not have to pay US$8.5bn in bonds due before the end of 2018. The debt restructuring is part of the country’s IMF-supported Extended Fund Facility (EFF), which is the fundamental framework behind the US$25bn in official financial support being provided to Ukraine approved in March 2015.
“The terms of the new sovereign notes issued today include contractual provisions which prevent Ukraine from paying such eurobond in accordance with its terms or settling with the holders of such eurobond on terms more favourable than those received by participating bondholders in the just-completed exchange offer,“ the Ministry of Finance explained in a statement.
From the 14 series of eurobonds only one did not participate in the exchange offer. It is the eurobond held entirely by Russia maturing in December 2015. The Russian government refused to support the debt operation, arguing the debt has the status of an official loan as opposed to a commercial one.
Ukraine’s other bondholders, led by Franklin Templeton, accepted a 20 per cent principal write-down, will receive new securities with a coupon increase to 7.75 percent, a four-year maturity extension with new maturities between 2019 and 2027 as well as GDP warrants.
Ukraine’s US$3bn eurobond with Russia matures on December 20th. But Ukraine cannot or does not want to pay its debt with Russia. After refusing to participate in the debt restructuring exercise, Russia recently offered to stretch its repayment over three years. The offer, addressed directly at the IMF, would allow Ukraine to pay US$3bn in instalments of US$1bn between 2016 and 2018. The IMF and other international institutions should provide guarantees for the full payment according to the Russian proposal. This offer was refused and the payment is heading to the courts.
In a first response, the Ukrainian Prime Minster Arseniy Yatsenyuk said Russia had to accept the same conditions of the restructuring as the other creditors. Yatsenyuk added there would be a moratorium until Russia accepts the conditions.
“I said to other lenders there are other conditions to be met or you will not receive the debt. The basic condition is reducing debt by 20%, the transfer of all debts of four years. If you do not like this, then you will receive the decision of the government of Ukraine via a moratorium on paying Russia the $3 billion. It is very easy to explain to our neighbours and the aggressor state: we will not pay $3 billion,” Yatsenyuk was cited by Russian news agency RIA Novosti.
More to do
After the restructuring rating agency Moody’s upgraded Ukraine’s government issuer rating to Caa3 from Ca. The rating outlook was changed to stable from negative. The nine new bonds created in Ukraine’s debt exchange operation were rated Caa3, and the ratings of the 13 bonds they replaced, including the three bonds issued by a government-guaranteed entity called Financing of Infrastructural Projects (Fininpro) in 2011, were withdrawn.
Moody’s decided to upgrade Ukraine as a result of the completed restructuring of “US$15bn in privately-held eurobonds issued or guaranteed by the government, which eases Ukraine’s debt-service requirements and strengthens the country’s external liquidity”. The decision was also driven by progress in the IMF-led political and economic reform programme, as analysts believe it to support rebalancing the economy.
Analysts at Moody’s estimate that “Ukraine is faced with multiple domestic and external challenges that constrain the rating in spite of the progress accomplished thus far. Past governments had a poor track record of implementing planned reforms, as exemplified by multiple unfinished IMF programmes just in the past decade.
“Although clear progress was made on meeting the initial requirements of the current IMF programme and the authorities are exceptionally determined to succeed, the political environment remains highly fractured after last year’s political upheaval and the economy is only now beginning to recover from a deep recession, after an estimated cumulative contraction of nearly 20% in real GDP in 2014-15.
We anticipate that such differences of opinion and associated delays in disbursements will be frequent occurrences over the next four years even in the likely case that this programme continues,” according to Moody’s analysts.