If you want some clues to how negotiations are progressing between Ukraine and its creditors, pay attention this Friday when a $120 million interest payment comes due.
With Ukraine threatening as recently as last week to halt bond payments if progress wasn’t made toward a restructuring deal, investors will be watching for the cash to arrive as a sign that talks, which began in earnest a week ago, are still on track. The nation’s Eurobonds, which have rallied 6.3 cents this month, suggest the market believes they are.
Investors are betting that Ukraine and the creditor group led by Franklin Templeton are moving toward a compromise after a two-month standoff over the need for a writedown to the face value of its bonds. Imposing a debt moratorium would trigger a default on all the nation’s Eurobonds, throwing talks into doubt and potentially inflaming relations with Russia, which has refused to include a $3 billion bond in the restructuring process.
“If they pay the coupon on Friday they keep all doors open for a compromise agreement,” Michael Ganske, the head of emerging markets at Rogge Global Partners in London, said by phone on July 20. “Once you go into a moratorium you have cross defaults, acceleration, and then Ukraine will end up in a messy situation.”
The Finance Ministry plans to make the payment on Friday, according to a person with knowledge of the situation, who asked not to be identified because the details are private.
There have been mixed messages from both sides since they decided on July 1 to take discussions private and begin direct negotiations. A joint statement last week hinted at compromise with talk of “narrowing the gaps” between their positions, while comments from Ukraine debt envoy Vitaliy Lisovenko and Franklin Templeton bond chief Michael Hasenstab in the previous few days suggested no readiness to give ground on the central issue of principal writedowns.
A moratorium will be called to “accelerate an agreement” if talks stall again, Lisovenko told the country’s Segodnya newspaper on July 15.
If the coupon isn’t paid on Friday, Ukraine has a 10-day grace period before a default is declared, allowing it to use the time to put pressure on the creditors, according to Anna Gelpern, a Georgetown University law professor and fellow at the Peterson Institute for International Economics.
“Making a threat not to pay is a staple, essential ingredient of a debt restructuring negotiation,” she said by phone on July 21.
Non-payment of interest would trigger cross-default clauses on Ukraine’s sovereign debt, including the $3 billion Eurobond Russia bought from the regime of former Ukrainian President Viktor Yanukovych.
Ukraine, which paid a coupon on the security in June, wouldn’t go into payment arrears with Russia if a moratorium was called until Dec. 20, when the principal payment is due, unless Russia decided to accelerate payment.
The International Monetary Fund, which is supporting Ukraine with a loan of $17.5 billion being disbursed over four years, has said it will continue lending to the country if it is in arrears to private creditors. Its policies don’t allow lending to countries that are in arrears to sovereign creditors.
Ukraine submitted a renewed letter of intent to the IMF on Tuesday, showing the country has fulfilled requirements for receiving the next disbursement, the Finance Ministry said in a statement on its website Wednesday. The IMF has said it wants to see progress on the negotiations before making the payment but hasn’t specified how much headway needs to have been made.
Investors may be too optimistic in overlooking the threat of default, according to Ivan Tchakarov, an economist at Citigroup Inc. in Moscow.
The sovereign’s $2.6 billion July 2017 notes rose 1.43 cents yesterday to 55.04 cents on the dollar after the government said it will hold a conference call with creditors on Wednesday to expand on progress made last week. The bonds slipped on Thursday as a person with knowledge of the negotiations said direct talks planned for this week have been postponed.
Ukraine has a 27.9 percent probability of defaulting on its debt in the coming year, the highest in the world, according to Bloomberg’s default risk model.
“Whatever is decided with this coupon will give us a good indication of where the talks are going,” Georgetown University’s Gelpern said. “If they they do make the payment, we should take that as a mild positive signal that there is progress in the negotiations.”
For more, read this QuickTake: Ukraine’s Other War