Ukraine $18 Billion Debt Accord Threatened by Lawmaker Rebellion

  • Lawmakers to vote Thursday on laws needed to approve debt deal
  • Rejection by parliament would imperil IMF aid program

After five months of often fractious negotiations with some of the world’s biggest bondholders, the greatest threat to Ukraine’s $18 billion debt restructuring may be from its own parliament.

Lawmakers are scheduled to vote Thursday on legislation needed to pass the bond deal struck between the government and its main creditors last month. On Wednesday there was only a 50 percent chance the bills would be approved amid jockeying for political leverage before local elections next month, according to a person familiar with the restructuring, who asked not to be named because the details are private.

A rejection by parliament would imperil the International Monetary Fund’s $17.5 billion bailout, which is conditioned upon the deal being completed, according to Finance Minister Natalie Jaresko. Even a delay in ratification poses risks because it would slow gaining final approval from bondholders, undermining Ukraine’s position with Russia over a debt that falls due in December.

"It surprises me that people are putting it at a 50:50 call," Tim Ash, head of EMEA credit strategy at Nomura Holdings Inc. in London, said on Wednesday. "The market is definitely not pricing that in."

Ukraine’s $2.5 billion of bonds due in July 2017 jumped more than 15 cents on the dollar the day the debt deal was agreed to by a Franklin Templeton-led creditor group and have since climbed about 5 cents to 76.47 cents in part on expectations it will be accepted. The accord calls for a 20 percent principal writedown, higher average coupons and warrants tied to a recovery in Ukraine’s economy.

Ukraine is already behind schedule on a plan outlined by Jaresko last month to complete the restructuring by the end of October. Under that, the deal should have cleared parliament and been presented to bondholders by Sept. 15. Investors must be given 21 days notice before a vote is held on the accord.

"The government should be highly interested in the success of this deal,” said Andreas Schwabe, an economist at Raiffeisen Bank International AG in Vienna. “It seems strange that they are now running into this problem with the vote."

Investor acceptance is also being threatened by potential holdouts from the private sector. A group of bondholders, represented by law firm Shearman & Sterling LLP, sought changes to the terms last week, saying the deal was biased against holders of debt due this year because their repayment will be delayed for longer than everyone else.

Russia is another wildcard, saying it expects payment in full on a $3 billion Eurobond due Dec. 20. While it has refused to take part in negotiations over the debt, getting the restructuring deal approved by other creditors will allow Ukraine to focus separately on its obligation to Russia. 

The risk of parliament rejecting the deal shouldn’t be taken too seriously by bondholders, according to Vadim Khramov, an analyst at Bank of America Merrill Lynch in London.

"It’s very unlikely the deal won’t go through," Khramov said. "It’s possible parliament might delay it until another hearing, but I don’t think there is a big enough majority to block it."

While Andriy Teteruk, first deputy head of Arseniy Yatsenyuk’s parliamentary group, said Wednesday all members would back the debt deal, Viktor Pynzenyk, a lawmaker from President Petro Poroshenko’s bloc, voiced his opposition, highlighting rebellion within the ruling coalition’s own ranks.

"I expect the politicians to agree in the end," said Lutz Roehmeyer, who helps oversee $1.1 billion of assets, including Ukrainian Eurobonds, at Landesbank Berlin Investment. "It would be a heavy blow to investor confidence if a deal that was negotiated through hard discussion with the most sophisticated market participants got rejected by parliament for populist reasons."

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