Moody’s Backs Creditor Math in Resisting Ukrainian Writedown

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Ukraine can save $15.3 billion in payments on external bonds without a principal writedown sought by the government in its restructuring talks with creditors, according to Moody’s Investors Service.

A failure in the talks, which so far have been “antagonistic,” and an outcome that leads to a moratorium on debt payments by Ukraine would have long-term implications for the country’s access to international bond markets, Kristin Lindow, senior vice president at the rating company, said in an interview Friday in London. Ukraine will face a delayed return to capital markets if it stops payments, Moody’s warned.

Ukraine is seeking new terms on $19 billion of debt from private bondholders to unlock further aid from an International Monetary Fund bailout. Talks have been deadlocked as creditors have insisted that a cut to face value isn’t needed to meet restructuring targets set by the Washington-based lender while the government has stuck to a demand for principal reductions.

“There are all kinds of ways to get to the $15 billion, with and without a haircut,” Lindow said. “The debt relief can be achieved in other ways -- significant cuts in the coupon and a long grace period on repayments and without a principal haircut. But there seems to be a determination on the part of the Ukrainian government and the IMF to get that haircut.”

Ukraine’s $2.6 billion of notes due July 2017 rose 2.6 cents, the most in more than two weeks, to 49.473 cents on the dollar at 5:52 p.m. in Kiev. The securities advanced after Russia said on Monday that it had received a $75 million coupon payment Ukraine owed on $3 billion of debt due in December.

Official Debt

Staff at the IMF formed a preliminary view that the securities sold to Russia by ex-President Viktor Yanukovych’s government should be classified as official rather than private debt, according to a person familiar with the matter. That would exclude them from the bond restructuring talks Ukraine is conducting with private creditors.

Aside from an agreement with foreign creditors for Ukraine to lessen its indebtedness, the IMF’s rescue package also hinges on the country cutting debt to 71 percent of gross domestic product by 2020 and reducing the budget’s gross financing burden.

Ukraine has rejected an offer made last month by a bondholder group led by Franklin Templeton because it would involve making payments out of central bank reserves. The creditor proposal was “not acceptable” because it would require the country to dip into reserves for $8 billion to repay debt, Ukrainian Finance Minister Natalie Jaresko told reporters in Kiev last week.

Near Default

Moody’s cut Ukraine’s credit rating to Ca in March, its second-lowest grade, which implies the country is “very near” a default. The company would consider the nation to be in default even if it secures debt relief “because the government wouldn’t be able to pay its obligations without a restructuring, what we call a distressed exchange,” Lindow said.

Ukraine is giving its creditors a few weeks to accept a restructuring proposal sent last week before imposing a moratorium on payments, a person familiar with the talks said on Friday. The IMF has pledged to keep supporting Ukraine even if the country stopped paying its bondholders.

‘Substantial’ Haircut

The plan is based on the nation’s deteriorating economic outlook after the IMF worsened its recession forecast for this year to a slump of 9 percent from 5.5 percent, according to Jaresko. The offer includes a “substantial” haircut, coupon reductions and maturity extensions, she said.

The creditor group on Monday urged Ukraine and the IMF to publish the lender’s latest assumptions so it can evaluate the proposal. The government’s plan includes a 40 percent principal writedown, according to the person, who asked not to be identified because the details are private.

“Both sides are pretty determined not to make any concessions on the issue of the haircut” Lindow said. “It would really take both sides relenting on that determination to be able to reach a deal.”

Moody’s predicts that Ukraine’s economy will contract 7.5 percent this year, followed by a decline of 2 percent in 2016. Weighing on the outlook is the lack of a resolution in the armed conflict with pro-Russian insurgents in eastern Ukraine, which is crippling companies reliant on the country’s industrial heartland.

(Updates with creditor offer in eighth paragraph.)
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