Ukraine Asks Creditors to Reach Deal Now or Risk Bigger Cuts
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Bloomberg) -- Ukraine’s Finance Minister Natalie Jaresko urged the nation’s bondholders, including Russia, to negotiate a debt-restructuring agreement now or risk facing bigger losses.
“This is the best time for us to do this,” Jaresko said in an interview in London on Tuesday. “The situation is relatively peaceful now. They do not want to be in a situation where there is an uncontrolled situation and we are forced to do a much worse deal for them.”
Speaking after her ministry held talks with Franklin Templeton and the 14 other largest U.K. and U.S. bondholders, Jaresko reiterated that Russia will not receive special treatment. The former Soviet republic needs to reach new terms on 29 bonds and enterprise loans before the next review of a $17.5 billion International Monetary Fund aid agreement at the end of the May, she said.
Verbal sparring between Ukraine and its bondholders is in full swing as talks begin against the backdrop of renewed fighting in eastern Ukraine that threatens to undermine a five-week cease-fire. Jaresko’s comments signal that Ukraine has limited scope for flexibility in its talks with Franklin Templeton and Russia, the biggest holders of its bonds. Both have indicated in recent days that they won’t accept any cuts to the principal value of the $10 billion of bonds they hold.
“If I were on the other side of the table, I would want to do this now because the risks that are out there are extraordinarily unpredictable,” Jaresko said. Ukraine needs a deal to “lift the burden of this debt off the shoulders of the Ukrainian people and off the shoulders of our budget.”
‘Small Box’
Investors are sceptical that creditors will get anything less than a steep writedown after 12 months of fighting between government troops and pro-Russian rebels drained hard-currency reserves. The $2.6 billion bond due in July 2017 slid to a record on Tuesday, falling 0.4 cent to 38.83 to the dollar by 4:39 p.m. in Kiev.
The notes tumbled below 40 cents last week, levels Bank of America Corp. said were consistent with about a 20 percent reduction in the principal and a 50 percent cut to coupon payments.
The market offers “good perspective” on where bond-restructuring is headed, according to Jaresko, who declined to speculate how large of a principal reduction bondholders will face.
“I have a very small box,” she said. “I admit there’s not a lot of room for creativity, but within this box, to the extent that we can be flexible and meet the creditors’ needs, we’re willing to do that.”
All Equal
Jaresko made clear that Ukraine plans to treat all creditors equally in the face of comments from Russian politicians that the country expects full repayment of its $3 billion Eurobond by December. Russian Deputy Finance Minister Sergey Storchak said March 17 that the nation isn’t taking part in the debt talks because it’s not a private creditor.
Relations between President Vladimir Putin and Ukraine have fallen apart since the National Wealth Fund bought the debt in December 2013, two months before Putin’s ally President Viktor Yanukovych was toppled in a bloody uprising in Kiev.
“We need to have a process that is transparent, that has a certain amount of justice, that has inter-creditor equity,” Jaresko said. “That means no special terms for any single investor or creditor, regardless of nationality.”
Talks Begin
While the security took the form of a tradeable Eurobond, it was sold at a 5 percent coupon, compared with a yield on 2017 debt at the time of about 12 percent. That has spurred speculation Russia will argue the bond should be treated as a bilateral sovereign loan.
“When the time comes I’m sure they’ll use the argument,” Jaresko said.
While Russia hasn’t responded to calls to start talks, other bondholders are in the process of forming a committee and negotiations will probably begin next week, Jaresko said. The minister has entrusted Vitaliy Lisovenko, who was in charge of the country’s debt restructuring in 1999-2000, to represent the government, along with adviser Lazard Ltd.
Jaresko was part of a delegation that met last week with Franklin Templeton. The money manager hired Blackstone to advise on its talks, according to a person familiar with the matter.
“We had a good conversation,” with Franklin Templeton, Jaresko said. “They are the largest creditor and I think they have very good understanding of the situation.”
Much Worse
Ukraine’s room to maneuver is limited after the insurgency drove international reserves to a record $5.62 billion in February. The economy shrank 7 percent to 10 percent in the first quarter, Jaresko said. The hryvnia has lost more than half of its value in the past year.
Failing to wrap up the talks before an end-May IMF review would jeopardize future disbursements, she said.
“If we are out of the IMF program and we are not receiving official support from anyone, it is much worse for the creditors’ interests,” she said. “I’m confident right now, given the conversations we’ve been having, that we will find a common understanding.”
Jaresko is holding meetings with creditors as the government in Kiev and pro-Russian separatists accuse each other of breaching a February truce. Ukrainian debt has handed investors losses of 29 percent this year, the worst among 58 emerging markets in a Bloomberg gauge of sovereign bonds.
A moratorium on Ukraine’s debt, which would delay the country’s return to international bond markets, remains an option if the country doesn’t reach a deal, Jaresko said in an interview with Bloomberg Television earlier on Tuesday.
“It’s not something I would like to consider,” she said. “I’d like to reach an agreement with the creditors so we can have renewed access to the markets over reasonable period of time.”
To contact the reporters on this story: Natasha Doff in London at ndoff@bloomberg.net; Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net
To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net; Wojciech Moskwa at wmoskwa@bloomberg.net; Daliah Merzaban atdmerzaban@bloomberg.net Daliah Merzaban
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