Ukraine Debt Decision Seen Imminent as Bonds Enter Notice Period
Time is running out for Ukraine to cut a deal with the holders of its $19 billion debt pile as the next big payments loom.
Ukraine would need to make any restructuring offer within days to ensure it allows enough time for consideration by bondholders before $500 million of notes fall due Sept. 23. If a debt moratorium is in the cards, an announcement this week could save Ukraine the $60 million interest that’s due on Sunday.
The Finance Ministry warned it was approaching the “final opportunity” for an accord before two days of talks with a creditor group led by Franklin Templeton last week. Failure to agree on principal reductions needed for savings targets outlined in a $40 billion International Monetary Fund-led bailout could result in Ukraine freezing debt payments, opening the door to legal action from bondholders that include Russia.
“The clock is ticking and decisions need to be made,” Timothy Ash, the head of emerging Europe, Mideast and Africa credit strategy at Nomura Holdings Inc. in London, said by phone on Wednesday. “Otherwise it’s a disorderly situation in September when the bond principal comes due.”
Any agreement reached with the creditor committee that holds about $8.9 billion of the country’s debt will need to be presented to other bondholders, with at least three weeks’ notice to hold a vote on the proposed new terms. That could be further extended if a quorum isn’t reached at the first meeting.
The creditor group owns about 26 percent of the September notes, according to data compiled by Bloomberg. A $3 billion bond due in December is wholly owned by Russia, which has rejected calls by Ukraine to restructure the debt.
Templeton Talks
The dollar-denominated September bonds fell 1.08 cents to 58.92 cents on the dollar at 3:53 p.m. in Kiev, taking this month’s decline to 2.6 cents. The bond rallied more than 10 cents in July and trades at about a 3 cent premium to the country’s longest maturity bonds, due in 2023, on bets that it may receive better treatment if no agreement is reached before the pay date.
“I don’t see a problem with the September Eurobond” for ongoing debt talks, Gintaras Shlizhyus, a Vienna-based strategist at Raiffeisen Bank International AG, said by phone Tuesday. “If there’s a principle agreement on the core parameters of the deal, creditors will gladly push back the maturity.”
Negotiations have dragged on for five months. Ukraine demanded a 40 percent reduction in bond principal in June while creditors offered a 5 percent so-called haircut in July, according to people familiar with the negotiations. Finance Minister Natalie Jaresko met with Templeton’s bond chief Michael Hasenstab in California for two days last week.
The Ukrainian parliament gave the government power in May to impose a debt moratorium if no progress is reached in its creditor talks.
Cease-Fire Threat
The country’s largest traded issue, a $2.6 billion bond maturing July 2017, fell 1.06 cents to 55.55 cents on the dollar on Thursday, the lowest level in more than a week on a closing basis. The notes may climb to near 60 cents if a deal is announced while a moratorium would push the price to 40 cents, according to Nomura’s Ash.
Ukraine’s 16-month tension with pro-Russian separatists is disrupting production in the country’s industrial heartland. Gross domestic product dropped 14.7 percent in the second quarter from a year earlier. A wobbly cease-fire is threatened by military tension and bickering over how to implement the peace agreement.
“It’s in nobody’s interests for this to drag on much longer,” Simon Quijano-Evans, the chief emerging-market strategist at Commerzbank AG in London, said by phone Tuesday. “We should see something within the next one or two weeks.”
For more, read this QuickTake: Ukraine’s Other War
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