GDP warrants offer bondholders an incentive to stay invested in a country by linking future debt payments to economic growth. If the economy grows above a certain level, they get more money back from their bonds.
The warrants included in a debt deal reached between Ukraine and its biggest creditors on Thursday offer bondholders annual payments for 20 years if economic growth crosses certain thresholds, Finance Minister Natalie Jaresko said at a briefing with journalists late on Thursday.
How are payments determined?
No payment will be made if growth is less than 3 percent
For growth between 3-4 percent, the payment will be 15 percent of the real GDP growth exceeding 3 percent
For growth faster than 4 percent, Ukraine will pay holders 40 percent of the expansion beyond 4 percent, in addition to amount for 3-4 percent growth
What are the limitations to payments?
Ukraine won’t pay anything to warrant holders if annual real GDP growth is slower than 3 percent for a year
There will be no payments until GDP reaches $125.4 billion, compared with GDP of about $80 billion-$84 billion now, according to Jaresko
Payments will be capped at 1 percent of GDP from 2021 to 2025
The first payment may be made on Jan. 15, 2021, calculated on growth in 2019
Holders will be eligible for a refund of the 20 percent face value write-off in the restructuring deal, should Ukraine fail to make payments due on the warrants
They will carry cross-default clauses on new bonds issued in the restructuring
What are the warrants worth?
The country’s IMF program sees 4 percent real growth rate from 2019, making some payments likely even as there’s significant uncertainty on Ukraine’s economic future amid a separatist conflict in its easternmost regions
The maturity of the warrants are relatively short compared with other debt overhauls: Argentina gave creditors 30-year instruments while Greece’s is 27 years
What do the analysts say?
Barclays sees the warrants adding 3-6 cents to the recovery value in Ukraine’s bond restructuring, assuming 3.5-4 percent growth rate over the long term and a 12 percent exit yield
That takes the recovery value for the Eurobonds to 65-70 cents on the dollar, according to Barclays analysts, including Andreas Kolbe
Bank of America’s Vadim Khramov values the warrants at 5-8 cents per dollar
Khramov says the value may be as much as 20 cents if growth stabilizes around 5 percent
Morgan Stanley sees fair value at 3-4 cents for the warrants, which strategist Robert Tancsa says are a hybrid of those issued by Argentina and Greece