Ukraine Eurobonds Decline as IMF Projects Larger Economic Slump

Ukrainian Eurobonds fell after the International Monetary Fund said the nation’s economy will contract more than expected this year, indicating tougher terms for investors in the country’s debt restructuring.

Ukraine’s $1.25 billion of bonds maturing April 2023 fell 0.91 cent to 50.92 cents on the dollar by 2:56 p.m. in Kiev, after jumping 3.98 cents last week, the most in a year. Gross domestic product may shrink 9 percent this year, the IMF said, revising a previous estimate for a 5.5 percent drop.

Ukraine’s bonds surged last week as Bloomberg reported the details of a creditor proposal that meets IMF targets for liquidity and debt sustainability yet doesn’t include any writedowns. A larger economic contraction may mean that the maturity extensions and coupon reductions put forward by the bondholders no longer comply with the restructuring’s debt-to-GDP goals.

“The downward revision of the forecast will lead to some deterioration in the debt metrics,” Jakob Christensen, an economist at Exotix Partners LLP in London, said by phone. It’s harder for the creditors to argue that this is a liquidity problem, which calls for some action on the principal, he said.

Ukraine is aiming to reach an agreement with bondholders by mid-June to qualify for the next slice of a $17.5 billion IMF loan. The government in Kiev needs the financial aid to replenish foreign-currency reserves as it seeks a return to growth next year after output contracted by 18 percent in the first quarter amid a separatist conflict in the country’s easternmost regions.

Negotiations Intensify

The nation’s Finance Ministry, led by Natalie Jaresko, has said repeatedly that a deal must include a principal writedown. Four creditors who own $8.9 billion of the nation’s Eurobonds led by Franklin Templeton, proposed last month that maturities should be extended for as long as 10 years and coupons lowered temporarily, according to a person familiar with the offer.

Negotiations are set to intensify before an assessment of progress on June 5, the Finance Ministry said in a statement Friday.

An agreement will probably include a 30 percent principal writedown, according to the average estimate of 13 economists in a Bloomberg survey conducted before Bloomberg reported the details of the bondholder proposal last week. Two analysts expected no reduction.

Ukraine has achieved “good program implementation” despite the “unresolved conflict in the east, which took a heavier-than-expected toll on the economy in the first quarter,” IMF economists said in a statement Sunday. Continued financial support from private creditors is vital for the success of the program, they said.

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