Ukraine Eurobonds Climb to Four-Month High as Debt Talks Stall

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Ukraine’s Eurobonds rose to the highest level in four months as investors looked past statements from Ukraine and its creditors last week that indicate talks to restructure about $19 billion of debt remain deadlocked.

The nation’s $2.6 billion of bonds maturing in July 2017 climbed 0.56 cent to 52.81 cents on the dollar at 6:30 p.m. in Kiev, extending the biggest weekly gain in a year. Its 2023 notes jumped 1.21 cents to 58.21 cents.

The bonds gained even after Ukraine and its creditors said on Friday little progress has been made in negotiations following a call between the Finance Ministry and creditors. The two sides are still divided over how the nation's debt burden should be reduced, with Ukraine seeking a principal writedown and the creditors insisting that International Monetary Fund targets can be met with maturity extensions and temporary cuts to coupons.

“Some investors are pricing the bonds higher because they still expect a better outcome from the ongoing negotiations,” Maksym Myronchuk, a fixed-income trader at PJSC Alfa Bank in Kiev, said by e-mail. “Most people are disregarding the statements from Friday since no one expected Ukraine would agree to the investor proposal anyway.”

Ukraine’s finance ministry said in a statement late Friday that it finds a restructuring proposal issued by creditors last month unacceptable and regrets that the offer hasn't been changed. A bondholder group, which owns $8.9 billion of the nation’s debt, said in a separate statement it was disappointed the sides have not found a basis for detailed negotiations.

The two sides will not hold face-to-face meetings any time soon because they are not yet in a position to discuss details, a person close to the negotiations said on Monday.

IMF Targets

The creditor group, led by Franklin Templeton, proposed on May 9 that extending maturities by up to 10 years, lowering coupon sizes and amortizing the bonds over a seven year period starting in 2019 would be enough to reduce Ukraine’s debt burden in line with the IMF restructuring goals, a person with knowledge of the committee’s thinking told Bloomberg last month.

The three IMF targets are savings of $15.3 billion over four years, reducing the ratio of debt to less than 71 percent of gross domestic product by 2020 and bringing the budget’s gross financing needs to an average of 10 percent of GDP from 2019 to 2025.

The offer is unacceptable because it “offloads” principal payments onto Ukraine’s central bank, the Finance Ministry said on Friday. Using the Ukrainian central bank’s reserves to pay debt is a violation of national law, according an e-mailed statement from the ministry.

“The bonds are mostly still trading in the 53-54 cent range,” Dray Simpson, the London-based managing director of emerging markets at Cantor Fitzgerald Europe, said by e-mail on Tuesday. “It’s hard to see a big move either way unless one or the other side changes its negotiating position and hence expectations of the result.”

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