Ukraine Crosses First Debt Hurdle With Bank Note Extension

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Ukraine crossed the first hurdle on the road to a $23 billion debt restructuring as the nation’s third-largest bank got bondholder approval to extend the maturity of one of its Eurobonds by three months.

The State Export-Import Bank of Ukraine received votes from an “overwhelming majority” of bondholders present at the meeting on Monday to push back the redemption date on $750 million of notes to July 27, the bank said on its website. The bonds rose 0.51 cent to 75.01 cents on the dollar at 4:35 p.m. in Kiev.

The vote marked the first test of Ukraine’s ability to reach new terms on 29 bonds and loans under a $17.5 billion International Monetary Fund bailout. The country needs cash after a yearlong conflict with pro-Russian separatists in the country’s east drained reserves to a record $5.6 billion in February and pushed the economy to a second year of recession.

“This deal has bought the Ukrainian side some time to refocus on the sovereign restructuring negotiations,” Tim Ash, chief emerging-market economist at Standard Bank Plc in London, said in an e-mailed note. This is “good news for Ukraine,” he said.

The government is trying to nail down new terms with creditors before a review by the IMF in June in order to qualify for the second part of the bailout. The first $5 billion tranche of aid helped raise reserves to almost $10 billion by the end of March.

Writedown Looms

Ukraine’s $2.6 billion of July 2017 notes increased 0.01 cent to 46.56 cents on the dollar on Monday, extending the biggest gain in six months last week. The government still must convince creditors including Franklin Templeton to swallow a writedown.

Ukreximbank needed at least one third of bondholders to participate in the vote on Monday, of which 75 percent had to say yes. Its 2015 bonds climbed 10 cents last week after a group of hedge funds holding 27 percent of the debt pledged to support a motion. The group including VR Global Partners LP, LG Partners LP and funds managed by Oaktree Capital Management LP also threw their support behind the bank’s initial restructuring proposal, which involves a seven-year extension and higher coupon payments.

Better Terms

“We intend to use the three-month extension to seek implementation of the reprofiling of the notes on terms that we announced last week,” Chairman Oleksandr Hrytsenko said in the statement. “We look forward to working with noteholders.”

Ukraine promised creditors of Ukreximbank and two other state companies better terms than sovereign bondholders. Their debt is subject to the first of three IMF targets for the country, which stipulates Ukraine should reduce financing costs by $15.3 billion over the next four years.

“Contrary to Ukreximbank’s operation which had to contribute only to liquidity targets, sovereign-debt restructuring will also need to reduce debt levels and debt service,” Ukraine’s Finance Ministry said in a statement on its website after the vote.

Ukraine rejected a proposal from a five-member creditor group led by Franklin Templeton and holding about $10 billion of the country’s debt earlier this month, saying it didn’t go far enough to meeting IMF targets because it only involved a maturity extension.

“The sovereign restructuring terms will not be as favorable as the ones of Ukrexim,” Lutz Roehmeyer, who oversees about $1.1 billion of emerging-market debt at Landesbank Berlin Investment GmbH in Berlin, including Ukreximbank bonds, said by e-mail Tuesday. “We are talking still about a friendly restructuring out of necessity and not from unwillingness to pay like in other sovereign restructuring cases.”

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