The Russia problem aside, Ukraine’s other big task in its $15bn debt restructuring will simply be to convince private bondholders that it’s a deal worth taking.
One way to do that is for bondholders to realise they are dealing with a government burdened with the costs of war and as it happens, increasingly absorbed in an intenselustration campaign.
But some of them (quite possibly one that lives in San Mateo, CA) could have holdings large enough to block a bondholder vote. So, even if Natalie Jaresko, the Ukrainian finance minister, does like to quote Margaret Thatcher about there being no alternative… the new bond terms will need to justify taking a massive haircutcompared to holding out for full payment.
Another way to do it? Note how ripe for abuse the old bond terms are.
When Lee Buchheit, Ignacio Tirado and Mitu Gulati were looking deep within the innards of Cypriot government bonds just over two years ago — shortly before the climax of the island’s debt crisis — they found something exciting.
Internationally-issued sovereign bonds have lots of interesting clauses.
Still, a boring, rather essential and ubiquitous one is to subject payments to “appropriate fiscal or other laws and regulations of the place of payment”. (Usually somewhere suitably dull, like London or Luxembourg.)
Cyprus also had one of these clauses, in its English-law bonds, which gave investors that little extra assurance of creditworthiness given the legislature couldn’t wake up one day and change the debt’s terms on a whim.
It just didn’t have the “place of payment” bit.
This was weird. Whether the omission had been by accident or design — it meant Cyprus didn’t really have an international bond. Without a specified place for the laws applicable to payment, Cyprus could say that it meant its own laws to apply.
That would have been very handy if, in future, Cyprus had wanted to warn any recalcitrant bondholders that it could quite legally interrupt payments unless they agreed to accept less than all their money back.
Which is why Buchheit et al were looking at the bond — to generate strategies for Cyprus to squash holdouts if it ever planned a sovereign debt restructuring. As it happened, eurozone officials decided (whether out of squeamishness, fear, or lack of time) to leave the bonds untouched and that it was a better idea to raid unsecured bank depositors instead. Funny how things turn out.
Doubly so actually.
Ukraine’s bonds are missing the “place of payment” language too.
Nor is it just the payments clause. There is wording in the bonds’ pari passu clause (below: these do tend to be dangerous for unwary drafters) and its negative pledgewhich appears to turn an English-law bond into quite a serviceable local-law one.
Bonds issued by the City of Kyiv — which will be included in the broader debt restructuring — do have place of payment language, so it’s even weirder.
Could Ukraine use this as a negotiation strategy then?
One advantage is that it simply creates uncertainty.
It’s actually very difficult to turn a lender to a distressed sovereign into a holdout. An investor has to turn down whatever recovery is being offered and wait — either for the government to quietly pay them off later, or for litigation which is going to suck up enormous amounts of cash and attention in the meantime, on the way to securing a basically unenforceable claim. It’s usually something of a career-killer for anyone with fiduciary responsibility for someone else’s money.
Pari passu is the most powerful enforcement device yet found, as with Argentina — but that clause is neutered here.
The dodgy payments clause probably wouldn’t let Ukraine reduce the amount of cash it pays to holders in perpetuity: the other, English-law bits of the contract must stand for something. But it might support fiscally impounding payments to bondholders for just long enough that most quickly decide the life of a holdout isn’t for them.
That could still leave some litigation. A clever bondholder might even argue a superficially-appealing point: the payments clause is pretty clearly a silly typo.
At which point Ukraine’s lawyers could counter by enumerating all the other sovereigns who’ve made the same mistake subtle manoeuvre in their own English-law bond contracts.
Sovereigns like Greece last year, in the first bond it issued since its bailout…
(The bond also has a pari passu clause adapted to avoid Argentina’s pitfalls, and nonegative pledge, so it’s an elegant disembowelling of creditor protection in more ways than one.)
Or best of all, Azerbaijan, in its 2024 bond…
Which explicitly substitutes its own laws for the absence of any other place of payment.
Ukraine could use these clauses with an air of menace then. The whole point is, it could do so promising to give the bondholders stronger payment and pari passu terms in the new restructured bonds if they sign up to the exchange. Although there’s a huge array of economic terms to negotiate which might include adding all sort of features to the contract, these clauses are basic legal plumbing.
Again, the need to make this promise depends on how able bondholders are to block a restructuring vote (more on this in a later post).
But in any case, next time sovereign bond lawyers spot some shoddy drafting in a contract, they may want to think before correcting it. A country in peril may yet rely on it some day…