Some Ukraine Bondholders in No Rush for Accord as Payday Nears
ot everyone is hoping for a speedy resolution to Ukraine’s debt restructuring.
Holders of a $500 million note due Sept. 23 are the most likely to benefit if negotiations drag on because they have a shot at getting paid back in full. The securities are changing hands near the biggest premium to the bonds due in 2023 since May, meaning a growing number of investors are betting that might be the case.
“The premium basically shows that there is a small chance that bond will get paid in full,” Vadim Khramov, an economist at Bank of America Merrill Lynch in London, said by phone on Aug. 4. “A small chance is enough to have the price difference because the upside is big.”
The gap reflects the increased likelihood that growing discord between Ukraine and a creditor committee led by Franklin Templeton will prevent an agreement from being implemented in the next six weeks. While the war-ravaged nation has threatened to default on all of its international debt if a deal isn’t reached as soon as this week, bondholders have shown few signs of caving in to the pressure as they argue for a smaller writedown than the Finance Ministry demands.
Ukraine will consider imposing smaller losses on the face value of bonds than the 40 percent it was seeking in June, while a four-member creditor group owning about $8.9 billion of the nation’s Eurobonds has offered a 5 percent so-called haircut, according to people with knowledge of the negotiations.
In a bid to bridge the differences, Finance Minister Natalie Jaresko plans to travel to Franklin Templeton’s home turf in California for negotiations on Aug. 12.
Fair Treatment
The friction last week ended a record monthlong rally in the nation’s debt, which posted the first weekly drop since June. The September note trades at about 59 cents on the dollar, while nine other dollar-denominated sovereign bonds have converged near 56 cents.
The price alignment reflects the most common outcome of a bond restructuring: all securities are swapped for a new series given to each investor no matter what they owned before, according to Charles Blitzer, a former official at the International Monetary Fund with experience advising sovereign restructurings.
Holders of shorter maturities fare worse because the principal they were due to receive is delayed for the longest time. Ukraine also has a 600 million ($656 million) euro note due Oct. 13.
“Investors at the short-end of the curve will want to be treated fairly,” said Clifford Atkins, a restructuring lawyer at Shearman & Sterling in London, who represents a holder of the Sept. 23 note who declined to be identified. “It’s not fair to treat long-term and short-term bonds the same.”
Debt Extension?
As Sept. 23 approaches, investors in that note may gain more negotiating leverage because Franklin Templeton’s group owns about 26 percent of it, compared with more than 50 percent in bonds due later.
Ukraine might ask those noteholders to agree to a temporary maturity extension to give it more time to reach an agreement, an approach taken by its second-largest lender, Ukreximbank, earlier this year. The bank’s investors secured a deal that included pushing back due dates, higher interest payments and no writedown to principal. The debt now trades above 80 cents.
Since the IMF’s $17.5 billion loan to Ukraine requires that it save $15.3 billion by changing terms on sovereign bonds, holders of the September notes may be less successful at getting a promise for more favorable terms in lieu of a maturity extension.
Averting Default
Ukraine needs to be careful not to alienate its biggest investors since the IMF aid envisions the country tapping global debt markets in late 2017 and freezing debt payments risks make this more difficult. Most respondents in a Bloomberg poll last week predicted a smaller-than-even probability that a moratorium will be imposed before Sept. 23.
There’s also a chance Ukraine won’t finish its debt revamp by the time a $3 billion bond owed to Russia matures on Dec. 23. Since Russia has threatened to take its neighbor to court if it isn’t paid, a default in September could create legal complications that Ukraine may want to avoid, analysts at Goldman Sachs Group Inc. including Clemens Grafe said in a research note on July 23.
The price of the Sept. 23 note climbed 2.05 cents to 59.18 cents on the dollar by 2:59 p.m. in Kiev on Monday after falling 4.4 cents last week.
Longer-dated investors will need to give “a substantially more attractive deal to holders of the September and October bonds in order to convince them” to accept a deal by next month, Goldman said in the note. Grafe said on Friday that the view hasn’t changed
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