If previous restructurings are anything to go by, the eventual deal between Ukraine and the holders of its debt is going to look quite different to the opening positions of either party.
Greek bondholders ended up accepting a 53.5 percent reduction on their principal in February 2012, seven months after agreeing to a 21 percent writedown. State-controlled Dubai World reached a second restructuring of $14.7 billion of debt this year after cutting coupons and extending maturities in 2011 and failing to reach a standstill in 2009. Argentina is still feeling the repercussions of the take-it-or-leave-it approach that it adopted in 2005.
Ukraine’s creditors are expecting a “speedy resolution” to negotiations “without any principal debt reductions,” according to a statement on Thursday. Ukraine has said it will cut the face value of bonds as well as reducing coupons and extending maturities as it seeks to meet the conditions of an International Monetary Fund bailout. A deal without writedowns is “not viable,” according to Michael Ganske from Rogge Capital Partners Plc.
“This is how restructuring negotiations always start, with unrealistic proposals,” Ganske, the head of emerging markets at Rogge in London, said by e-mail Thursday. “There will be negotiations and they will meet in between.”
A creditor committee that holds about $10 billion of Ukrainian debt is working on a plan that “provides Ukraine with the necessary financial liquidity support,” the group said in the 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.
The country is seeking to alter terms on at least $21.7 billion, data compiled by Bloomberg News show. There are three targets for the restructuring: $15.3 billion of savings over four years; a debt-to-gross domestic product ratio of below 71 percent by 2020; and the budget’s gross financing needs at an average of 10 percent of GDP from 2019 to 2025.
The government’s $2.6 billion of bonds due in July 2017 climbed 0.58 cent to 43.36 cents on the dollar by 4:21 p.m. in Kiev, after climbing to a three-week high on Thursday.
“In our estimate the target of 71 percent debt-to-GDP implies a 35 percent haircut to the face value,” which bondholders are unlikely to accept, Vadim Khramov, an emerging-markets analyst at Bank of America Corp. in London, said Thursday by phone. The creditor group has “a strong bargaining position, but they need two thirds of votes for each bond and will need other bondholders support,” he said.
Ukraine has been forced into negotiations with creditors after burning through its foreign-exchange reserves trying to shore up 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. The IMF is offering a total of $17.5 billion of loans if all conditions are met.
The restructuring will involve “coupon reduction, nominal reduction and a maturity extension,” Ukraine’s Finance Minister Natalie Jaresko said in London on March 24. How it comes out in the end “will depend on conversations with creditors,” she said.
The process may be helped by clauses that can impose a restructuring by supermajority. Argentina’s sovereign debt didn’t have such clauses, allowing almost 25 percent of bondholders to hold out for better terms in the 2005 debt exchange that followed its $95 billion default in 2001.
While a second bond swap in 2010 reduced the amount of holdouts to 7 percent, the South American country has remained in litigation with those creditors until today.
Ukraine’s Finance Ministry said on April 4 that bonds of State Export-Import Bank of Ukraine and AT Oschadbank were excluded from the second and third target, spurring a 14-cent rally in the past three days in Ukreximbank’s $750 million of notes due April 27. The bonds retreated 0.16 cents on Friday.
Bondholders had until 4 p.m. on Thursday in London to vote on a proposal to push back the debt maturity to July 27 so that it can be included in negotiations on the same timeline as the sovereign debt.
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.
“Everyone is waiting for the next move,” Jakob Christensen, an economist at Exotix Partners LLP in London, said by phone on Thursday. “It will be important to see what the government comes out with. The Ukrainian ministers have said they want to conclude the deal by the end of May, so they really don’t have a lot of time.”