Ukraine Creditor Proposal Said to Cut Coupons, Extend Debt

Ukraine's Debt Burden
Pipeline of sovereign and corporate foreign-currency bond maturities shows what's at stake as government scrambles for deal with creditors.

The first proposal by a group of Ukraine’s creditors to restructure about $20 billion of debt would extend maturities as much as 10 years and reduce interest payments, a person with knowledge of the committee’s thinking said.

While the government in Kiev rejected the bid and stuck to a demand for principal reductions, analysts say it marks a productive start to meeting International Monetary Fund targets and clearing the way for aid to lift Ukraine’s economy out of a recession. Intensive talks between advisers will happen next week, the Finance Ministry said in an e-mailed statement. The nation’s debt rallied the most in five weeks.

“It is a concrete proposal that will help Ukraine get through the coming years without the need for a de-facto default,” Simon Quijano-Evans, the head of emerging-market research at Commerzbank AG in London, said by e-mail. “A no-haircut scenario would enable Ukraine to access bond markets again this year.”

Russia remains the wild card as talks with private creditors led by Franklin Templeton appear to move forward. President Vladimir Putin’s government is threatening legal action if Ukraine fails to pay back a $3 billion Eurobond in seven months, signaling Russia may use the default threat along with an outstanding energy bill to turn up the heat on Ukraine amid a tentative cease-fire.

Ukraine’s $2.6 billion of debt maturing in July 2017 rose 1.2 cents to 47.80 cents on the dollar by 10:24 p.m. in Kiev, the most since April 22.

Creditor Terms

The Franklin Templeton-led creditor group, which owns about $8.9 billion of bonds and has access to investors holding at least an additional $1.1 billion, submitted its proposal on May 9. It involves amortizing the bonds over a seven-year period starting in 2019, according to the person, who asked not to be identified because the talks are private.

The proposal would lower the interest and principal burden in the beginning, achieving a reduction of about $500 million on interest payments, the person said.

The maturity extensions differ from bond to bond and the plan will yield savings for Ukraine of $15.8 billion in the first four years, exceeding the IMF’s $15.3 billion target, according to the person. In the latter years, Ukraine would need to pay higher coupons and gradually repay principal.

The group argues the plan also complies with objectives to reduce the ratio of debt to less than 71 percent of gross domestic product by 2020 and bring the budget’s gross financing needs to an average of 10 percent of GDP from 2019 to 2025.

Ukraine Rebuttal

“The committee has its best foot forward and crafted something that either meets the sovereign’s requirements or exceeds them,” Blackstone Group International Partners LLP said on behalf of the creditor committee in an e-mailed response to questions.

The group -- which includes BTG Pactual Europe LLP, TCW Investment Management Co. and T. Rowe Price Associates Inc. -- declined to comment on specific details.

Ukraine doesn’t accept the terms set out in the creditor proposal because it involves using central bank funds to cover $8 billion of early principal payments over 2019 and 2020, according to another person with knowledge of the negotiations, who asked not to be identified because the details are private. The interest savings in the offer are closer to $360 million, the person said.

“A reduction in coupon and nominal is necessary in achieving the IMF’s three targets for Ukraine’s medium-term debt sustainability,” the Finance Ministry said in an e-mailed response to questions. Ukraine is being advised by Lazard Ltd.

Russia Bond

The country’s economic situation has unraveled since Russia annexed Crimea in March 2014, sparking a separatist conflict in the easternmost regions. The economy shrank almost 18 percent in the first quarter.

Franklin Templeton is Ukraine’s single biggest creditor, followed by Russia, which purchased debt from the regime of former President Viktor Yanukovych before he was overthrown in February 2014. Ukraine owes Russia almost $29.5 billion for natural gas, OAO Gazprom Chief Executive Officer Alexey Miller said Thursday, a claim state-owned NAK Naftogaz Ukrainy disputes.

Tensions between private creditors and Ukraine flared earlier in May as they blamed each other for stalling talks, signaling they were communicating through the media rather than in private meetings. Ukraine has parliamentary backing to impose a moratorium on coupon payments if needed.

Talks Planned

The person familiar with the creditor’s proposal said the committee has received no substantive response from Ukraine to its offer nor have there been regular meetings between advisers.

Finance Minister Natalie Jaresko and bondholders had a discussion by phone Friday, according to the second person, who said creditors rejected Ukraine’s offer for a face-to-face meeting next week. Ukrainian officials and creditors will hold a call after advisers have talked on June 5, according to the Finance Ministry.

The price of Ukraine’s $500 million note maturing Sept. 23 climbed 0.8 cents to 51.17 cents on the dollar.

“Ultimately we will have a friendly restructuring and it will involve a relatively small haircut of about 20 percent,” Ivan Tchakarov, a Moscow-based economist at Citigroup Inc., said by e-mail. “The fair value of bonds is around 50ish or so. The price moves we are seeing, in my view, now reflect such a scenario.”

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