Progress between Ukraine and its creditors on a $19 billion restructuring may be losing momentum as a proposed high-level meeting was canceled amid further disagreements over terms.
Ukraine’s $2.6 billion of 2017 notes fell the most in a month after a person familiar with negotiations said a new offer put forward by Ukraine this week would be unacceptable to bondholders. Later on Wednesday, Ukraine’s Finance Ministry said that a Franklin Templeton-led creditor group should prepare an improved offer for meetings next week.
Renewed discord threatens a rally that pushed the securities up by the most on record last month on optimism a deal may be imminent. Due to legal and timing constraints, a meeting next week is the last opportunity to reach a full agreement in time for a $500 million bond maturity on Sept. 23, Ukraine’s Finance Ministry said in a statement on its website.
“Talks are moving but there needs to be a trigger to push one of the sides to compromise,” said Vadim Khramov, an economist at Bank of America Merrill Lynch in London who expects the two sides eventually to agree to a 20 percent principal reduction. “That trigger might be a moratorium, which is becoming more likely as the deadline nears for the September bond.”
The 2017 note slid 0.84 cent to 56.77 cents on the dollar at 8:13 p.m. in Kiev after a 9.9 cent surge last month. Ukraine’s $1.25 billion sovereign Eurobonds maturing in June 2016 retreated 1.27 cent to 56.37 cents, the biggest drop since June 10.
The person familiar with the talks said the creditor group had rejected the proposal to hold a meeting in London this week, saying it would be premature with just 48 hours notice, given the geographically disperse nature of the committee’s membership.
Franklin Templeton, Ukraine’s biggest bondholder, is based in San Mateo, California. The other members of the group, which owns about $8.9 billion of Ukraine’s Eurobonds, are BTG Pactual Europe LLP, TCW Investment Management Co. and T. Rowe Price Associates Inc.
A two-month standoff was ended in early July with the first direct meetings between the Finance Ministry and the creditor committee. Even though bondholders were said last week to have included a principal writedown in their proposals for the first time, there may still be a considerable gap between both parties.
The creditors offered a so-called haircut of 5 percent to face value, conditional on economic performance, a person familiar with the details said on July 30, while Ukraine was said to be looking for a 40 percent writedown in June.
If a deal is not reached early next week, Ukraine would be forced to implement “alternative options” to meet debt-sustainability targets laid out in a $17.5 billion International Monetary Fund aid program, the Finance Ministry said without elaborating.
A spokesman for the creditor committee declined to comment on the Finance Ministry’s statement when contacted by e-mail.
“The problem is not about a quick or a slow deal; there will be a deal, eventually, but the whole question is to know at what price,” said Regis Chatellier, a London-based strategist at Societe Generale SA. “I think a 30 percent haircut is a likely scenario, and the longer it takes for the deal to happen, the more the market will start pricing the scenario of tough restructuring conditions.”