Ukraine Notes Fall as IMF Says It May Lend If Creditors Not Paid

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Ukraine’s bonds tumbled after the International Monetary Fund said it can keep supporting the country even if it stops payments to bondholders.

The nation’s $500 million of notes due September, the first of its international obligations to come due, had their biggest decline in almost three months. The IMF’s policy allows it to lend when a country has arrears with private creditors, First Deputy Managing Director David Lipton said Tuesday in Washington.

The comments rekindled fears that Ukraine may opt to default on its international debt if creditors don’t submit to its demands for cuts to the face value of about $19 billion of bonds. Ukraine passed a law last month allowing it to impose a moratorium on debt payments.

“The IMF statement may increase the perception that Ukraine will use the debt moratorium,” Dray Simpson, the London-based managing director of emerging markets at Cantor Fitzgerald Europe, said by e-mail on Wednesday. “It really comes down to the creditors and whether they’re willing to compromise or just dig their heels in and say no way to a haircut.”

The notes due Sept. 23 dropped 3.16 cents, the most since March 17, to 52.34 cents on the dollar at 8:05 p.m. in Kiev. The $2.6 billion of securities maturing in July 2017 fell 1.74 cents.

Ukrainian Finance Minister Natalie Jaresko, who is holding talks with the IMF in Washington this week, said in an interview on May 21 that the fund would need to sign off on any decision to impose a moratorium.

Board Meeting

An IMF board meeting, where the lender will decide if Ukraine has made enough progress on reforms to receive the next slice of a $17.5 billion loan, will be held in early July, a person close to the government said on Wednesday, asking not to be identified as the details haven’t been made public.

The IMF’s statement comes as it remains, along with the European Union and the European Central Bank, locked in negotiations with Greece as the nation tries to unlock funds to help meet debt payments this month. Greece surprised markets on June 5 when a payment due that day was bundled with two others to be paid at the end of the month.

The IMF’s statement shows the lender is trying to avoid having “a blaze on two fronts” as it seeks to resolve an impasse between Greece and its creditors, Simon Quijano-Evans, head of emerging-market research at Commerzbank AG in London, said by e-mail on Tuesday.

Ukraine and its creditors are still divided after two months of talks over how the nation’s debt burden should be reduced, with the country seeking a principal writedown and the creditors insisting that IMF targets can be met with maturity extensions and temporary cuts to coupons.

Coupon Payments

Ukraine has two coupon payments due on sovereign bonds next week, including $75 million it owes by June 20 on a Eurobond that Russia bought from the regime of former President Viktor Yanukovych before he was overthrown in February 2014.

Euroclear has been informed that Russia is the only holder of the $3 billion bond due Dec. 20, Interfax reported Deputy Finance Minister Sergey Storchak as saying on June 8, three days after Ukraine requested all of its creditors to reveal their identities through the clearing system. Russia said on May 20 it will take Ukraine to court if the government in Kiev fails to make its next coupon payment.

Ukraine’s bonds last week rallied the most this year amid optimism that intense negotiations between advisers and a direct call last Friday between Jaresko and creditors would break the deadlock on the debt talks as they enter a third month.

‘Overvalued’ Bonds

A creditor group led by Franklin Templeton said that day it was disappointed with the lack of progress in negotiations while Ukraine’s Finance Ministry said it “regrets” that the committee’s offer remains unchanged.

“The bonds have been overvalued for some time on anticipation of an outcome that’s more beneficial for creditors,” Eugene Petrusha, a Kiev-based analyst at Empire State Capital Partners Ltd., said by phone. Today’s decline “is a correction of recent gains as we haven’t seen any tangible results from the negotiations,” he said.

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