Ukraine Bonds Drop After Lagarde Puts Creditor Proposal in Doubt

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Ukraine’s Eurobonds fell after the International Monetary Fund’s top official backed the Finance Ministry in its rejection of a creditor proposal that involves servicing its debt out of central bank reserves.

Using central-bank reserves to service new debt would be “inconsistent with the objectives” of Ukraine’s debt operation, because Ukraine would have to borrow further to replenish its buffer, IMF Managing Director Christine Lagarde said in an open letter on the fund’s website on Friday.

Lagarde’s stance calls into question the credibility of an offer made last month by a bondholder group led by Franklin Templeton that seeks to avoid a writedown of principal as the nation seeks new terms on $19 billion of international debt. Ukraine has rejected the proposal, even though creditors say it meets the IMF’s three stated restructuring targets, because it would involve making payments out of central bank reserves.

“This statement is quite important because the IMF will be signing off on the deal at the end of the day,” Jakob Christensen, an economist at Exotix Partners LLP in London, said by phone on Monday. “I would take this quite seriously if I was the creditor group. If the IMF doesn’t approve, they can’t go forward with such a proposal and then they will have to rethink.”

The nation’s $2.6 billion of bonds maturing in July 2017 fell 0.40 cent to 47.45 cents on the dollar at 4:23 p.m. in Kiev after sliding 4.4 cents last week. Ukraine’s notes due Sept. 23, 2015, rose 0.75 cent to 51.75 cents.

Principal Payments

The bondholder proposal seeks to extend maturities of Ukrainian bonds by as much as 10 years, while lowering the nation’s interest and principal burden in the first four years before raising them later, a person with knowledge of the committee’s thinking said on May 29. Principal payments will total about $8 billion in 2019 and 2020, another person familiar with negotiations said on the same day.

Lagarde stopped short of saying that using central bank reserves to service debt is illegal under Ukrainian law, which has been the main complaint of the Finance Ministry.

Ukraine’s reserves would be at the same level under the creditor proposal as IMF projections and the group has no plans to revise the proposal, despite Ukraine’s objections, another person with knowledge of the talks said on Friday.

The country’s gross reserves will reach $38.7 billion by 2020 from $7.5 billion at the end of last year, according to IMF forecasts in a March report.

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