Ukraine’s Creditors Say Disappointed by Debt Talks This Week

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Ukraine’s creditors said they were disappointed with progress in a $19 billion debt restructuring, signaling the biggest weekly rally in the nation’s bonds in 14 months may be shortlived.

After talks this week between advisers on both sides, a bondholder committee including Franklin Templeton has “not yet found the basis for detailed negotiations between principals,” according to an e-mailed statement from the group on Friday. Ukrainian bonds stayed higher, with $1.25 billion of notes due in April 2023 rising 4.43 cents to 57.07 cents on the dollar.

A key stumbling block has been the divide between a government seeking a writedown to reduce its debt burden and bondholders insisting a so-called haircut isn’t necessary. Ukraine wants debt relief after the country’s economic situation unraveled following Russia’s annexation of Crimea in March 2014, which sparked a separatist conflict in the easternmost regions.

“The market is asserting, based on the pricing that is thrashed out on a daily basis, that the creditor committee proposal will win the day,” Michael Roche, a fixed-income strategist at Seaport Global Holdings LLC, said by phone from New York. “There’s a fair amount of stagecraft between the two sides” as they move toward the final days of negotiations.

Ukraine’s Finance Ministry on Friday said it “regrets” that the committee’s offer remains unchanged. The creditor proposal to “offload sovereign claims into the books of the National Bank of Ukraine is unacceptable,” the ministry said.

Burden Sharing

That proposal assumes using the Ukrainian central bank’s reserves, a violation of national law, according an e-mailed statement from the ministry.

The bondholder committee should enter talks on “appropriate burden sharing by creditors,” consistent with the International Monetary Fund’s Extended Fund Facility program, the ministry said.

Finance Minister Natalie Jaresko said she’s willing to meet with creditors, and called on the bondholder committee to remove barriers for “more constructive” talks.

The bondholder group, which owns $8.9 billion of the nation’s debt, said it’s “optimistic that the country is now closer to entering a more virtuous cycle and that we can remain a partner in the country’s efforts to regain market access.” Other members of the committee are BTG Pactual Europe LLP, TCW Investment Management Co. and T. Rowe Price Associates Inc.

Haircut Debate

The nation’s 2023 debt has rallied 7.9 cents since Bloomberg revealed details on May 29 of the first offer put forward by the creditor committee. The proposal suggested Ukraine can meet targets set out in the IMF aid package if it cuts coupon sizes and extends maturities by up to 10 years, a person with knowledge of the committee’s thinking told Bloomberg last week.

Ukraine has insisted a so-called haircut must be part of the restructuring to meet the goals of the $17.5 billion loan, including an objective to lower the nation’s debt to 71 percent of gross domestic product by 2020.

The economy shrank almost 18 percent in the first quarter, leading the IMF to lower its 2015 contraction forecast to 9 percent last month and prompting speculation creditors may be forced to accept harsher terms.

Earlier on Friday, Ukraine requested the identity of holders of the $3 billion Eurobond bought by Russia, in addition to the 13 other sovereign securities involved in the restructuring, according to a statement on RNS. The deadline to submit disclosure forms is June 11.

Wild Card

Russia, which purchased the debt from the regime of former Ukrainian President Viktor Yanukovych two months before he was overthrown in February 2014, has been the wild card in the restructuring. President Vladimir Putin’s government is threatening legal action if Ukraine fails to pay back its bond in December or the coupon payment due on June 20.

The disclosure request “shows that Ukraine is still intending to include the Russian bond in the current debt operation,” Andreas Schwabe, an economist at Raiffeisen Bank International AG in Vienna, said by phone Friday. “The restructuring of the Russian bond is even more difficult given the additional political dimension.”

Russia has said its debt should be treated as official aid and not be reprofiled, while Ukraine argues that the debt was structured as a Eurobond under U.K. law and is therefore liable to the same treatment as private creditors.

Finance Minister Natalie Jaresko said on May 15 that Ukraine hadn’t received responses to a request seeking contact with bondholders via three custodians in Russia.