Russia Won’t Take a Haircut on Its Ukraine Loan as West Wants

This article originally appeared at Zero Hedge

War-torn Ukraine has reportedly reached a restructuring deal with a group of creditors headed by Franklin Templeton, according to the country’s finance minister Natalie Jaresko. The terms of the agreement call for a 20% writedown and a reprofiling that includes a maturity extension of four years and an across-the-board 7.75% coupon. 

President Petro Poroshenko hopes the restructuring deal will save the country billions on the way to helping Kiev adhere to the terms of its IMF bailout. Here’s more from Bloomberg:

The 49-year-old Ukrainian leader, elected last year after becoming a billionaire in the chocolate business, was racing to reach a comprehensive accord with creditors before a $500 million bond comes due next month. 

Ukraine will temporarily suspend payments on that bond and a 600 million-euro ($677 million) note due in October, the Finance Ministry said in today’s statement. The country has a further $4 billion of payments scheduled by year’s end.

A final agreement requires the approval of 75 percent of bondholders of each note at a meeting in which at least two-thirds of them are represented. Ukraine’s debt contains cross-default clauses that mean missing a payment on one results in default on all.

The government earlier threatened to declare a debt moratorium to push negotiations along.

Franklin Templeton, which owns about $7 billion of Ukrainian bonds, were joined in the talks by fellow creditors BTG Pactual Europe LLP, TCW Investment Management Co. and T. Rowe Price Associates Inc.


One person who will not be accepting the new terms is newly-minted bond vulture Vladimir Putin who, back in March, threatened to undermine negotiations with other creditors by holding out on some $3 billion in 2-year notes Moscow bought back in 2013 to help out then-President Viktor Yanukovych. “Russia won’t participate in Ukraine’s debt restructuring,” Finance Minister Anton Siluanov told Bloomberg by telephone.

Jaresko said she’s “offering Russia a restructuring opportunity that is the same as everyone else’s” which she figures is “the best way to depoliticize” the issue and “for us to all move forward together.”

That, apparently, is not in the cards, but there is still a distinct possibility that everyone will move backward together. Just ask Poroshenko who told a crowd on Monday at a ceremony in central Kiev to mark 24 years of Ukrainian independence from Moscow that:

“We have to get through the (coming) 25th year of independence as if on brittle ice.

We must understand that the smallest misstep could be fatal. The war for Ukrainian independence is continuing.” 

And then there’s this, via Reuters:

Seven Ukrainian servicemen have been killed and 13 wounded in fighting with pro-Russian separatists in the past 24 hours, military spokesman Oleksander Motuzyanyk said on Thursday.

The casualties were the highest daily losses for the Ukrainian army since mid-July, as violence continues to test a six-month-old ceasefire deal.

Meanwhile, Ukraine’s central bank took the country 300 bps “closer” to ZIRP, slashing rates 300bps to only 27% citing, amusingly, “a fall in inflationary risks.” 

Needless to say, the situation in Ukraine is a very, very long way from stabilizing and as we’ve detailed extensively of late, there’s a non-zero possibility that one or more of the country’s unofficial militias (whose leaders have been the subject of not-so-flattering comparisons to a certain fascist political movement that attempted to take over the world in 1939) will attempt a military coup even as the separatists push for autonomy. 

Summed up in one picture…

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Here’s Goldman’s take

Main points:

1. Finance Minister Jaresko, in a special government session called today, announced that Ukraine has reached agreement with the ad hoc creditor committee on a bond restructuring deal.

This deal includes a 20% nominal haircut, a coupon of 7.75% (up from 7.25% previously) and a maturity extension of 4 years for each bond.

It also includes GDP warrants that pay out over the period 2021-40 if growth exceeds 3%, subject to nominal GDP exceeding US$125.4bn (the IMF’s projection for 2019 GDP). Minister Jaresko argues that these deal parameters are consistent with the IMF’s three objectives for the debt operation.

2. While the 20% nominal haircut was reported in the press last week, in our view the coupon increase to 7.75% and the 4-year maturity extension are likely more favourable than market expectations for a lower coupon and longer extension.

3. In order for the restructuring to take place, bondholders will have to approve the exchange offer on a bond-by-bond basis with a sufficient majority and subject to a minimum quorum. In our view, given the attractiveness of the offer relative to market expectations, the risk of a holdout scenario is relatively low.

4. Based on our estimates, the deal parameters imply average bond prices across the curve of 57 cents at a 14% exit yield, 63 cents at a 12% exit yield and 70 cents at a 10% exit yield.

Our base case remains for a 14% exit yield, based on our estimated fair value as a function of Ukraine’s macro fundamentals and also consistent with past episodes of restructuring. These estimates assume zero value for the GDP warrants, likely a conservative assumption.

5. In addition, given that the same parameters apply to all bonds on the curve, this deal favours lower-coupon bonds over higher-coupon ones. The relatively shorter maturity extension than expected, in our view, favours the front end over the long end of the curve.

Based on our estimates, at a 14% exit yield, the premium for the shortest-maturity (2015) bond over the longer-maturity (2023) bond should stand at 12 points. At a 12% exit yield, it should be 10 points, and at a 10% exit yield, 5 points.

6. Russia has said that it will not participate in the bond exchange. Minister Jaresko has reiterated that Ukraine will not treat Russia differently from other creditors.

Thus, how Ukraine and the IMF (which likely views the Russian-owned bond as official debt) will address the issue of this bond maturing in December remains an open issue and should, ceteris paribus, require a higher exit yield.

7. While the terms of the debt restructuring will likely satisfy the IMF’s criteria, in our view, the question of the sustainability of Ukraine’s debt remains open.

As we have argued previously, this will likely hinge on the willingness and ability of the Ukrainian authorities to follow through on structural and governance reforms and on developments in the conflict in Eastern Ukraine.

Relative to the IMF’s forecasts, our macroeconomic outlook for Ukraine is considerably weaker in the medium term, with trend growth of around 2% during the structural adjustment and the Hryvnia weakening in our projections to UAH 30 vs. the USD.

In our view, under this scenario, questions of debt sustainability may well resurface in the coming years. Uncertainty about the outlook as well as the geopolitical conflict, in our view, is an additional reason why we argue for a higher exit yield of 14% than consensus market expectations (which we estimate stand at around 12%).

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