On July 24 the Ukrainian government made a $120 million interest payment on the sovereign's 2012 eurobonds, however a credit-negative debt payment moratorium remains an imminent risk, reads a report on the website of Moody's Investors Service.
"The bond is one of several debt issuances at the center of the government's negotiations with existing sovereign bondholders to obtain $15.3 billion of debt relief. Finance Minister Natalie Jaresko had threatened to impose a moratorium on these bonds if creditors had not agreed to a restructuring that included a haircut on the bonds' principal - the main sticking point in the restructuring discussions - by the time of the next payment. Even though the government has not yet reached an agreement, we believe the sovereign paid the coupon because it judged that the negotiations had made enough progress such that it did not want to antagonize creditors and jeopardize the negotiations. We expect that the government will make a $60 million interest payment on its 2011 eurobonds by an August 23 deadline for the same reason," according to the rating agency.
"However, we think the real test will come in late September. That is when we expect that the International Monetary Fund (IMF) and other multilateral and bilateral creditors will insist that the government reach an agreement on private-sector debt relief before approving the next quarterly review of Ukraine's performance under the IMF's Extended Fund Facility and disbursing the next tranche of the program. As a consequence, if creditors and the government fail to finalize an agreement by the time of the September IMF review, we expect the government to withhold payment when a $500 million bond issued in 2010 matures on September 23," Moody's stated.
"The negotiations between Ukraine and the bondholders group over a proposed bond restructuring made little progress after the March 11 signing of an IMF agreement that stipulated a June deadline for reaching an agreement. Although the IMF specified that a "debt operation" would be a key element to restore Ukraine's long-term debt sustainability, the IMF purposely left the precise nature of the operation to the negotiators," according to the statement.
"Once substantive talks between Ukrainian officials and the bondholders began in May, it became clear that the two sides held distinctly different positions regarding whether such extensive debt relief as agreed to with the IMF was needed, and if so how to achieve the targeted debt relief. In the finance ministry's interpretation, a substantial haircut is necessary to achieve the target, in part because of the IMF's secondary target: that the government's debt/GDP ratio fall to under 71% by 2020 from nearly 90% now. The bondholder committee continues to insist that maturity extensions and coupon reductions will be sufficient to achieve those targets and that a haircut would hamper the government's ability to regain market access," reads the posting.
"Given the contentious nature of the discussions, Ms. Jaresko asked the Ukrainian parliament for the authority to impose a selective moratorium on the government's foreign debt payments. Legislators approved the request in May, but that did not provide an immediate impetus to restart the negotiations. The IMF later said that it would continue to make disbursements under the Extended Fund Facility program even if the government imposed a moratorium on its eurobonds. These developments motivated both sides to work toward reaching an agreement," the rating agency said.
"We think the bondholders and Ukrainian government can find common ground before September on the basis of an apparent willingness of each side to give some ground. Still, in the absence of such an agreement, the risk of a missed payment remains high and rises as the second IMF review and the $500 million bond repayment approach," reads the report.