Ukraine bondholders will probably have a tougher time in the next round of debt restructuring talks than creditors of the nation’s third-largest bank.
State Import-Export Bank of Ukraine awarded creditors higher coupon payments and guaranteed to pay principal in full to avert default on $750 million of bonds due Monday. The price of Ukraine’s sovereign Eurobonds suggests holders will have to accept as much as a 50 percent cut to face value, according to Citigroup Inc.’s Ivan Tchakarov.
“There are some people who are trying to project the solution that was agreed with this bank on to the upcoming sovereign negotiations, but that doesn’t make any sense from Ukraine’s point of view,” Tchakarov, Citigroup’s economist in Moscow, said by phone on Monday. “From the point of view of the sustainability of Ukrainian debt, it needs to be pushing for a haircut.”
Ukraine must save $15.3 billion in debt-servicing costs over four years to clinch the next slice of a $17.5 billion International Monetary Fund loan in talks scheduled for June. Its yearlong conflict with pro-Russian rebels has left Ukraine without enough reserves to pay its debt beyond this year.
Ukreximbank had just two weeks to win over bondholders after failing to secure a three-month maturity extension on April 13. The bank offered on April 20 to increase the coupon to 9.625 percent from 8.375 percent and push the redemption date back to April 2022 if it got more time to negotiate the deal.
The first of Ukraine’s sovereign Eurobonds comes due on Sept. 23. The $500 million of notes fell 0.04 cent to 51.46 cents on the dollar at 7:28 p.m. in Kiev on Tuesday. Ukreximbank’s 2015 notes fell 1 cent to 74.17 cents.
“Both sides won some time to continue negotiations,” said Michael Ganske, who helps oversee $6 billion in emerging-market assets, including Ukrainian debt, as a money manager at Rogge Global Partners Plc in London. “It reveals that the Ukrainian side and the creditors want to avoid an outright default situation. With the Ukraine 2015 bond maturing in September, it will be interesting if by then there is no agreement.”
Ukreximbank’s bonds, like those of other state-owned enterprises AT Oschadbank and Ukrainian Railways, are being treated differently to the sovereign debt in that they are only being used to help the country meet the first of three targets mandated under the IMF bailout.
The first relates to the $15.3 billion of savings over four years. The second is to bring the ratio of public and publicly guaranteed debt-to-gross domestic product to below 71 percent by 2020, while the third seeks to keep the budget’s gross financing needs at an average of 10 percent of GDP in the 2019-to-2025 period.
“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 Monday’s vote.
Finance Minister Natalie Jaresko said in an interview on Tuesday it’s “not possible” to reach the three targets without a combination of cuts to the bonds’ principal and coupons.
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.
“Negotiations will be harder and not as trivial as in the case of Ukreximbank,” Jean-Dominique Butikofer, who helps oversee more than $2.5 billion in debt as head of emerging markets at Atlanta-based Voya Investment Management, said by e-mail on Monday. “The markets are pricing a potential higher haircut for the sovereign.”