Ukraine Bonds Have Best Month on Record as Writedown Seen Small

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Ukraine’s Eurobonds rallied, on course for their biggest monthly gain on record, as details of a new creditor proposal fueled optimism that bondholders won’t have to accept big losses in a $19 billion debt restructuring.

The notes traded near 60 cents on the dollar for the first time since February, a month before Ukraine started warning its investors that they would have to accept writedowns on their principal holdings. A creditor committee led by Franklin Templeton submitted a proposal to Ukraine this week that includes a 5 percent so-called haircut, a person familiar with the negotiations said on Thursday.

The offer shows the group is still pushing for a deal that gives minimizes losses, despite calls from Ukraine last month for a 40 percent write-off. Ukraine rejected an earlier proposal from creditors that focused on pushing back due dates and reductions in interest payments without any reduction to the principal.

“Expectations are rising that the Ukrainian side won’t be able to get the full haircut it’s asking for,” Dennis Masich, a Stockholm-based bond trader at SEB AB, said by e-mail. “The price action is a little too optimistic as the parties are still far away from reaching an agreement.”

The fair value of the eastern European country’s bonds is about 46 cents on the dollar, analysts at Oxford Economics said on July 28, predicting a 65 percent probability that the restructuring deal would include a 35 percent writedown.

Ukraine’s $2.6 billion of bonds maturing in July 2017 climbed 2.1 cents to 58.63 cents on the dollar at 5:10 p.m. in London, extending gains this month to 10.1 cents.

IMF Approval

The rally “reflects the lack of bonds on offer and that holders want to increase prices to help press for better restructuring terms,” Dmitri Petrov, a London-based analyst at Nomura Holdings Inc., said by e-mail. The debt’s fair value is about 50 cents on the dollar with “quite optimistic assumptions,” he said.

Ukraine needs to alter terms on its debt as a condition for a $17.5 billion International Monetary Fund aid loan aimed at pulling the economy out of a recession that’s deepened in the 16 months since a battle with pro-Russian separatists started in the east.

The IMF executive board approved a $1.7 billion tranche of the aid on Friday after Ukraine demonstrated it was following through on reform promises and making progress in the debt talks, the fund said in a statement.

The creditor offer, which followed a new proposal from Ukraine last week, brings the sides closer to a compromise needed before a $500 million bond matures Sept. 23. That bond climbed 3.47 cents to 61.42 cents on the dollar on Friday, extending a premium over the other bonds that could imply investors think it may get a better deal. Ukraine may extend the maturity on that bond to continue discussions, Nomura’s Petrov said.

“This was a smart move from the creditors,” said Peter Schottmueller, who helps manage $17 billion including Ukrainian bonds as the head of emerging-market fixed income at Deka Investment GmbH in Frankfurt. “Now it is impossible for Ukraine to stick to their ambitious haircut.”