Following almost half a year of talks with creditors, Ukraine announced the expected restructuring parameters for all its sovereign bonds (UKRAIN, UKRINF) at a total par value of USD 18.0 bln.
· A 20% haircut for all the bonds
· All the bonds (maturing between Sept. 23, 2015 and Apr. 17, 2023) will be exchanged into the sameset of new bonds that will mature between 2019 and 2027.
· The coupon rate on all the new bonds will be 7.75%.
· The holders of existing bonds will also receive value-recovering instruments, GDP warrants.
That means that each holder of existing bonds will have to exchange USD 100 in face value of its paper into:
• USD 80 in nine new issues of bonds with a coupon rate of 7.75% that will mature between 2Q 2019 and 4Q 2027.
• Warrants providing some potential upside to the debt holders, which value currently can be ignored.
· Ukraine is going to do all the necessary bureaucratic steps to prepare restructuring offers by Sept. 15.
· The Finance Ministry expects to complete the exchange process by late October.
· The two bonds that mature by that time (USD 500 mln due on Sept. 23 and EUR 600 mln due on Oct. 13) will also fall under the restructuring. Ukraine will have to announce a moratorium of their repayment.
Effect on bonds: positive suprise
The market reacted promptly on the announcement of the restructuring, which turned out much better than investors were initially expecting. Following the news, the bonds gained 12-20% in price.
This is a clear sign that the market was expecting worse restructuring conditions.
While the size of the haircut was more or less clear (leaked info said it would be close to 20%), the maturity extension and coupon rate was much better than we expected. In particular:
· We were anticipating a seven-year maturity extension for all the bonds, while the result was a zero toeqight years effectively (or five years, on average).
· We expected the coupon rate on the new bonds would decrease, while the offered rate (7.75%) appeared to be higher than the weighted average rate for the current bonds (7.22%, we estimate).
Current YTM: about 11%
Now all the bonds, independent of their maturity and coupon rate, trade between 67% and 69% of their par value. Based on the offered restructuring parameters, the price of 68% yields about 11.0% to the bonds’ extended maturity (not accounting for value-recovery instruments). This looks like a fair yield on the bonds.
Effect on Ukraine’s economy
· With the restructuring, the Ukrainian government will likely smoothen its repayment schedule of international debt and will extend its average maturity from 2018 to 2023 (about 4.5 years).
· From 2015 to 2018, Ukraine won’t repay any debt, if the restructuring goes smoothly. According to the current debt repayment schedule, USD 11.5 bln would have been due for this period.
· Coupon payments of the government are estimated to be slightly higher for 2015-2018 after the restructuring: USD 3.3 bln vs, USD 3.0 under the current bond structure.
· Savings of USD 3.6 bln from the haircut on all the state bonds.
Russian USD 3.0 bln bond
Russian Finance Minster Anton Siluanov already commented that his government (which indirectly, through a state-controlled fund, holds USD 3.0 bln in debt due in late December) won’t participate in the deal.
Since MinFin had insisted throughout the talks that “Russian debt” should be treated pari passu with all the other Eurobonds, we do not believe the Ukrainian government in any way will positively discriminate the Russian debt holder. Therefore, it looks certain to us that Ukraine won’t repay this bond in December.