How Ukraine reached on a $18bn debt deal?

Ukraine reached what its finance minister called a “win-win” deal with its largest group of creditors to ease repayments on its $18bn debt, winning breathing space for an economy drained by the cost of fighting with pro-Russian separatists.

The agreement, which includes a write-down of 20% of the principal owed, ended months of tense negotiations aimed at helping to keep Ukraine on track with its International Monetary Fund-led bailout programme, plugging a funding gap and preventing a unilateral debt default.
As both sides vowed to work together to secure full support from bondholders for the deal, the only dissenting voice came from Russia, a big creditor, which said it would continue to demand full repayment by Ukraine of a $3bn eurobond coming due in December.

The creditors, led by Franklin Templeton and including other asset managers, accepted a small increase in the coupon on most of the bonds to 7.75% and extended each maturity by four years. However, it must be approved by creditors outside the group. Ukraine said the deal, announced yesterday, would reduce the payments due over the next four years by $11.5bn. This will free up funds to help the war effort in the east, support the poor, cover purchases of Russian gas over the winter period and help keep the national currency, the hryvnia, stable according to a factsheet issued by the finance ministry.

“Everyone’s done well out of this deal. That’s why it’s collaborative. It’s not one side winning, it’s a win-win situation. We’re all now moving forward without putting the value of the bonds at any further risk,” Finance Minister Natalia Yaresko said late on Wednesday in remarks embargoed until yesterday. The country’s sovereign dollar bond prices surged and debt insurance costs fell after the details were released.
Ukraine and the creditors said in a joint statement they would work together “to ensure the rapid implementation of the deal.”

But though Prime Minister Arseny Yatseniuk and Yaresko savoured a victory after months of gloom, there was a question mark over whether the other creditors would fall in line. The joint statement appealed to other bondholders to approve the deal and urged the international community to provide non-debt support to Ukraine in the form of grants. In Washington, IMF chief Christine Lagarde said it was important that the agreement gained “broad support from all concerned eurobond holders”.

Yaresko said she hoped it was “highly unlikely” remaining creditors would reject the agreement and forecast that the process would be wrapped up by the end of October. However, a dispute immediately took shape with Russia over Ukraine’s $3bn eurobond that matures in December.

Russian Finance minister Anton Siluanov said Moscow needed foreign currency and therefore could not participate in Ukraine’s restructuring agreement. He said that Ukraine’s debt to Russia was official, country-to-country debt rather than commercial debt. “We have always insisted and will continue to demand from Ukraine a full implementation of the (Eurobond) terms,” Siluanov told the state-run Rossiya 1 television channel. “We insist on a full repayment in December of this year of $3bn, including interest payments,” he said.

Kiev views Russia’s $3bn bond as part of the sovereign and sovereign-guaranteed bonds to be restructured under the agreement. Defaulting to Russia would carry fresh risks for Ukraine because the IMF is not officially allowed to continue lending to a country that is in default to another sovereign. Ukraine’s 2017 dollar bond issue firmed 8.7¢ to trade at 64.5¢ in the dollar on news of the deal according to Tradeweb data, while the 2022 bond rose 10¢.

An issue maturing at the end of September, which is also subject to restructuring, rose 4.3¢ to also trade at 64¢. Market players endorsed the deal terms as more favourable to creditors than initially expected when Ukraine had insisted on a 40% writedown. Also, while a 20% writedown had been broadly priced in over recent weeks, a coupon of 7.75% and the inclusion of GDP warrants — new instruments linked to growth-recovery — appeared to be the main drivers for a 10-11¢ rally in bond prices.

“The maturity extension was a little bit better than expected because people were thinking they would extend even longer,” said one fund manager in London who holds the bond. “And the coupon is not as low as some people fear so now everyone needs to run their spreadsheet to work out the NPV (net present value) of the bonds.” NPV refers to the worth of future bond payments in current terms. But some said the deal might not be enough to put Ukraine’s economy on the right path.

“Clearly more generous to bond holders than I had thought,” said Exotix credit strategist Jokob Christensen. “I have a hard time seeing how this generous deal will help reduce the debt to 71% of GDP in 2020, which is one of the crucial targets in the operation..”

Gabriel Sterne, head of global macro at Oxford Economics also cast doubt on whether the deal would make Ukraine’s debt levels sustainable and added: “There is a strong likelihood that they will be back at negotiating table in before too many IMF reviews have passed.”