Ukraine Debt Given Final Value of 80.625% at Swaps Auction

  • Pricing in line with market valuation for Ukraine's bonds
  • Auction clears way for investors to vote in restructuring deal

Sellers of credit-default swaps on Ukraine may have to pay 19.375 cents on the dollar to settle insurance contracts covering bonds in the country’s $18 billion debt restructuring, according to auction results.

Traders set a final price of 80.625 percent of face value for the 14 sovereign and state-backed notes in Ukraine’s debt overhaul, according to administrators Markit Group Ltd. and Creditex Group Inc. The final price is 1 percentage point higher than the initial price set at the first round of bidding earlier in the day and compares with bond prices as low as 38 cents on the dollar in March, before Ukraine started negotiations with its creditors.

The auction clears the way for investors holding Ukraine’s CDS and dealers selling the contracts to settle obligations by Thursday, allowing bondholders to decide if they want to participate in the restructuring by a mid-Oct. vote deadline. Ukraine triggered insurance contracts by failing to redeem a bond maturing Sept. 23 by the end of a 10-day grace period, the International Swaps & Derivatives Association said Monday. 

"It’s good that they managed to get the auction out of the way before the bond exchange," said Dmitri Petrov, a London-based analyst at Nomura Holdings Inc. "The final auction price is in the upper bound, which is fair, given where the bonds have been trading."

IMF Loan

Bond prices have rallied about 25 cents to trade near 79 cents on the dollar since Ukraine announced a restructuring agreement with a group of creditors led by Franklin Templeton in August. That deal includes reducing the face value on bonds by 20 percent, extending maturities, as well as offering investors warrants with payments tied to the country’s economic performance.

The swaps, which pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to meet its debt obligations, covered a net notional amount of $332 million on Sept. 25, according to the Depository Trust & Clearing Corp. That compares with $396 million a week earlier, before the maturity of contracts on Sept. 20. ISDA has ruled that investors holding those contracts will be eligible for insurance protection as Ukraine had announced the moratorium on Sept. 19.

Ukraine is restructuring its foreign debt to meet terms on a $17.5 billion International Monetary Fund loan that is propping up the country’s economy after a conflict with pro-Russian separatists in its easternmost regions drained reserves and plunged it into a recession. The Washington-based fund expects economic output to slump 11 percent this year, before expanding 2 percent in 2016.

It cost $1.95 million in advance to insure $10 million of Ukraine’s debt for five years on Monday, according to quotes given by data provider CMA, in addition to $500,000 annually. That compares with $4.22 million in advance two months earlier, before the debt deal was announced.

"Investors were right to hedge against default," Regis Chatellier, a London-based director for emerging-market credit strategy, said by e-mail. "The bond restructuring is important to make sure that Ukraine is able to eventually come back to global markets."

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