Ukraine Offers Creditors GDP Warrants. Here's How They Work

  • Payments to holders are linked to country's economic growth
  • Barclays sees warrants adding 3-6 cents to recovery value

GDP warrants offer bondholders an incentive to stay invested in a country by linking future debt payments to economic growth. If the economy grows above a certain level, they get more money back from their bonds.

The warrants included in a debt deal reached between Ukraine and its biggest creditors on Thursday offer bondholders annual payments for 20 years if economic growth crosses certain thresholds, Finance Minister Natalie Jaresko said at a briefing with journalists late on Thursday.

How are payments determined?

  • No payment will be made if growth is less than 3 percent
  • For growth between 3-4 percent, the payment will be 15 percent of the real GDP growth exceeding 3 percent
  • For growth faster than 4 percent, Ukraine will pay holders 40 percent of the expansion beyond 4 percent, in addition to amount for 3-4 percent growth

What are the limitations to payments?

  • Ukraine won’t pay anything to warrant holders if annual real GDP growth is slower than 3 percent for a year
  • There will be no payments until GDP reaches $125.4 billion, compared with GDP of about $80 billion-$84 billion now, according to Jaresko
  • Payments will be capped at 1 percent of GDP from 2021 to 2025

What are the terms on the warrants?

  • The first payment may be made on Jan. 15, 2021, calculated on growth in 2019
  • Holders will be eligible for a refund of the 20 percent face value write-off in the restructuring deal, should Ukraine fail to make payments due on the warrants
  • They will carry cross-default clauses on new bonds issued in the restructuring

What are the warrants worth?

  • The country’s IMF program sees 4 percent real growth rate from 2019, making some payments likely even as there’s significant uncertainty on Ukraine’s economic future amid a separatist conflict in its easternmost regions
  • The maturity of the warrants are relatively short compared with other debt overhauls: Argentina gave creditors 30-year instruments while Greece’s is 27 years

What do the analysts say?

  • Barclays sees the warrants adding 3-6 cents to the recovery value in Ukraine’s bond restructuring, assuming 3.5-4 percent growth rate over the long term and a 12 percent exit yield
  • That takes the recovery value for the Eurobonds to 65-70 cents on the dollar, according to Barclays analysts, including Andreas Kolbe
  • Bank of America’s Vadim Khramov values the warrants at 5-8 cents per dollar
  • Khramov says the value may be as much as 20 cents if growth stabilizes around 5 percent
  • Morgan Stanley sees fair value at 3-4 cents for the warrants, which strategist Robert Tancsa says are a hybrid of those issued by Argentina and Greece
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