Ukraine Bonds Drop Amid Escalation of Rhetoric With Creditors

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Ukraine’s Eurobonds fell for a third day as the government and creditors stepped up the verbal battle over restructuring $19 billion of the nation’s debt.

The country will stop making payments on its debt if talks don’t make progress, Finance Minister Natalie Jaresko told reporters in Washington Wednesday. Bondholders are “deeply concerned” about Jaresko’s stance, a creditor group led by Franklin Templeton said in a statement today.

The comments suggest a two-month impasse in negotiations is only hardening as coupon payments come due this month and a $500 million note matures in September. Bonds fell yesterday after the International Monetary Fund said it could keep funding Ukraine even if the country halts payments to creditors.

“The positions of Ukraine and creditors are far-far away,” Gintaras Shlizhyus, a Vienna-based strategist at Raiffeisen Bank International AG, said by phone Thursday. “That makes me believe that we are talking about the prolongation of talks maybe even beyond September.”

The nation’s $2.6 billion of notes due July 2017 slid 1.26 cents to 47.78 cents on the dollar at 7:07 p.m. in Kiev, taking their three-day drop to 4.82 cents, the most since the period ended March 19. Bonds due in April 2023 declined 2.18 cents to 53.99 cents.

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.

Jaresko has told creditors that a 40 percent principal writedown is needed to meet the objectives the IMF has set for the restructuring, a person familiar with the talks said on Thursday.

Not Acceptable

A proposal that includes a haircut of that size “does not form the basis for a debt operation that is acceptable,” the creditor committee said in an e-mailed response to questions. The Wall Street Journal reported the number earlier. A spokesman for Ukraine’s finance ministry declined to comment.

The minister has consistently said that bondholders must accept a cut to principal as well as smaller coupons and maturity extensions, yet hasn’t revealed the details of her proposal. The creditor group made an offer last month that it says meets the IMF’s goals without the need for a writedown.

“This puts the value of Ukrainian bonds at around 45, way below market levels,” Regis Chatellier, a London-based director of emerging-market credit strategy at Societe Generale SA, said by e-mail. “The hope for no haircut on Ukraine debt is/was unrealistic from the point of view of debt sustainability.”

Offer Rejected

The creditor group’s proposal includes extending maturities by as much as 10 years, temporarily lowering coupons and amortizing principal payments over seven years starting 2019, a person familiar with the proposal told Bloomberg last month.

Jaresko has rejected the offer on the grounds that it assumes Ukraine can make payments out of its reserves, something it says is illegal. The Finance Ministry has calculated that a 40 percent write down would make the same savings as the creditors are proposing would come from reserves, the person familiar with the negotiations said.

“Minister Jaresko has been in possession of a detailed IMF-compliant solution from the bond committee for over a month,” the committee said today. “We are ready and willing to start talks at any time.”

Ukraine must pass three bills relating to its IMF program before it can call a board meeting with the IMF to unlock the next tranche of a $17.5 billion loan from the Washington-based lender, Jaresko said yesterday. Two laws relate to independence and structure of the central bank, while the third relates to improvements in the ability of the state oil and gas monopoly to collect receivables, she said.

‘Adversarial Atmosphere’

IMF officials completed a review of Ukraine’s program in Kiev on May 29.

“As long as there is dialog there is no need to use a moratorium at this point,” Dray Simpson, the London-based managing director of emerging markets at Cantor Fitzgerald Europe, said by e-mail on Thursday. ‘It just creates a more adversarial atmosphere and we can see how well that’s worked in Argentina and Greece.’’

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