Ukraine Debt Negotiations a Step Closer as Templeton Forms Group

Franklin Templeton and four other leading Ukraine creditors have set up a committee to negotiate debt-restructuring terms with a government struggling to avert a default, according to a person close to the talks.

The group is being advised by Blackstone and Weil, Gotshal & Manges LLP, according to the person, who asked not to be identified because the details are private. A representative of Lazard Ltd., which Ukraine hired for the negotiations, declined to comment when contacted by Bloomberg News on Wednesday.

Government bonds rose as the committee’s formation paved the way for talks to start with Ukraine, which needs to reach new terms on 29 bonds and enterprise loans before the next review of a $17.5 billion International Monetary Fund aid agreement at the end of May. Franklin Templeton is the biggest bondholder with about $7 billion, followed by Russia, which bought a $3 billion Eurobond from the country in December 2013.

“Templeton and one or two other big shots should be enough to reach an agreement,” Andreas Rein, a money manager who helps oversee $470 million in assets, including Ukrainian Eurobonds, at Uniqa Capital Markets GmbH in Vienna, said by e-mail. “There is still nothing clear on the $3 billion Russian bond and that still complicates the story.”

Russia ‘Holdout’

The nation’s $2.6 billion of notes due July 2017 advanced for the second time this week, gaining 0.70 cent to climb above 40 cents on the dollar by 4:23 p.m. in Kiev. A price of about that level signals creditors will face writedowns to their principal holdings of about 20 percent, Bank of America Corp. said in March.

While 70 percent of analysts surveyed by Bloomberg last week said Ukraine probably won’t face a disorderly default, Russia insists it should be treated differently from other creditors and expects full repayment when the bonds come due in December.

That puts it at odds with its neighbor, with Finance Minister Natalie Jaresko saying March 24 that Russia would be treated like all other creditors since the notes took the form of a tradeable Eurobond governed under U.K. law.

“Russia is unlikely to participate in the upcoming debt restructuring and will effectively hold out,” Vadim Khramov, an analyst at Bank of America Merrill Lynch in London, said in an e-mailed note on Tuesday. “The decision to pay the $3 billion Eurobond would impose a higher burden on other debtholders.”

President Vladimir Putin’s government invested in the debt to support Ukrainian ally and former President Viktor Yanukovych, and the deal should be regarded as “official” state aid, Russian Finance Minister Anton Siluanov said in Moscow on March 27. The securities carried a 5 percent coupon, compared with a yield on the 2017 debt at the time of about 12 percent.

Talks with creditors will probably begin this week, Ukraine’s Jaresko said last Tuesday, urging them to reach an agreement now or risk facing bigger losses later.

A year of fighting in eastern Ukraine between pro-Russian separatists and government troops drove the nation’s international reserves to a record-low $5.62 billion in February. The economy probably shrank 7 to 10 percent in the first quarter, according to Jaresko, while the nation’s currency lost more than half of its value in the past 12 months.

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