Ukraine Creditor Group Has Plan to Avoid Writedown in Debt Talks

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Ukraine's Finance Minister Natalie Jaresko
Ukraine's Finance Minister Natalie Jaresko said on March 24, output shrank 7 to 10 percent in the first quarter. Photographer: Chris Ratcliffe/Bloomberg

Five creditors that own about $10 billion of Ukraine’s bonds are working on a debt-restructuring deal that won’t involve a reduction to their principal holdings as the government seeks to change the terms of its external debt.

The committee is working on a plan that “provides Ukraine with the necessary financial liquidity support,” the group said in a statement released by Blackstone Group International Partners LLP. Franklin Templeton, Ukraine’s biggest bondholder with about $7 billion of the nation’s debt, hired Blackstone to represent the creditor group in mid-March, according to Blackstone.

Ukraine needs to reach an agreement with creditors by the end of May to save $15.3 billion over four years as a condition for receiving the next tranche of a $17.5 billion International Monetary Fund loan. The government’s $2.6 billion of bonds due July 2017 advanced 1.54 cents to a three-week high of 43.01 cents on the dollar by 2:19 p.m. in Kiev.

“For sure, the creditors will try to achieve” a deal with no principal reduction, “but realistically it is not viable,” Michael Ganske, who helps manage $6 billion as head of emerging markets at Rogge Global Partners Plc in London, said by e-mail Thursday. “Ukraine’s debt-to-GDP is much too high and the economy is shrinking.”

Public-sector debt is set to rise to 94 percent of gross domestic product this year, according to the IMF, after a yearlong conflict with pro-Russian separatists in the nation’s east crippled its economy. Output shrank 7 to 10 percent in the first quarter, Finance Minister Natalie Jaresko said on March 24.

The country is seeking to restructure at least $21.7 billion, data compiled by Bloomberg News. A price of about 40 cents signals creditors will face writedowns to their principal holdings of about 20 percent, Bank of America Corp. said in March.

‘Speedy Resolution’

The press office of Ukraine’s Finance Ministry declined to comment when contacted by Bloomberg News. A representative of Lazard Ltd., which Ukraine hired for the negotiations, also declined to comment.

“The creation of this single representative committee should permit a speedy resolution of Ukraine’s liquidity issues,” the group said late on Wednesday. The creditors are “willing to agree a debt solution that delivers a stable economic platform to allow Ukraine and its people to restore growth,” it said.

‘Very Difficult’

Ukraine has been forced into negotiations with bondholders after burning through its foreign-exchange reserves trying to support the hryvnia. Its cash pile fell to a record $5.6 billion in February, while a $5 billion aid tranche from the IMF helped bolster that level to $9.97 billion in March.

“Now it’s official that major bondholders will be resisting a haircut,” Giuliano Palumbo, a money manager who helps oversee $3 billion in emerging-market debt for Arca SGR in Milan, including Ukrainian bonds, said by e-mail on Thursday. “But frankly speaking, it might be very, very difficult to push through ‘no haircut’ idea, given the IMF’s target.”

Russia, which is Ukraine’s second-biggest creditor after buying a $3 billion Eurobond from the country in December 2013, insists it should be treated differently from other creditors and expects full repayment when the bonds come due in December. Ukraine’s finance ministry has said Russia is like all other creditors since the notes took the form of a tradeable Eurobond governed under U.K. law.

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