Moscow doesn’t send tanks into revolting former vassals any more. It sends dollars.
For anyone who decides to follow the money when it comes to Ukraine’s split between the EU and Russia, the consequences can sometimes be grimly surreal when it gets to the prosaic matters of bond finance.
Take events this week. Even as Kyiv burned on Tuesday, Viktor Yanukovich’s government had already found the time to file with the Irish Stock Exchange for a $2bn increase in a $3bn, two-year Eurobond which it first issued late in December.
Don’t bother trying to buy some of that $2bn. The mere 5 per cent coupon should have already told you something is artificial here. The new notes are supposed to go straight to Russia, as part of a $15bn bailout the Kremlin is drip-feeding like so much water torture. Pretty much right as we went to pixels on this post, Reuters was reporting that Russia’s purchase might be delayed for “technical” reasons. Hmm. Still, if the purchase and the broader package remained on track, Ukraine’s sovereign debt bill would be paid this year, but would be $15bn the year after.
As the WSJ has already pointed out, this fact adds new boilerplate language to the Eurobond’s latest prospectus, possibly the most ironic ever to grace the risk factor section of a sovereign bond (given the bond’s buyer):
Given the size of this external financing requirement in 2015, there is a significant risk that funds available in the domestic and international capital markets will be insufficient to cover this requirement in full, andtherefore Ukraine’s ability to refinance or repay this debt will in large measure be dependent on relations with Russia at the time and Russia’s willingness to refinance the debt as it matures. There can be no assurance that Russia will be willing to refinance such maturing debt on similar terms or at all, and in the absence of such refinancing (unless financing is then available to Ukraine in the domestic or international capital markets and/or an IMF or other programme of official support has been negotiated by Ukraine in the meantime) there is a risk that Ukraine may be unable to meet its external debt obligations.
Though readers in the Kremlin are also told “Accession to the EU is a long term strategic goal of the Government”!
But there is a broader point here.
Russia is effectively becoming a major official creditor of Ukraine — or this Ukrainian government, anyway. What happens to the debt if the opposition takes charge? Good question, we think. But the Russian government must be confident that this will not happen, because it is buying bog-standard Eurobonds. Not, say, making an official loan which could carry more bespoke terms, including on seniority vis-a-vis other creditors.
Which means we have another boilerplate pari passu clause to look at! An especially surreal one:
The Notes constitute direct, unconditional and, subject to the provisions of Condition 3 (Negative Pledge), unsecured obligations of the Issuer and (subject as aforesaid) rank pari passu without any preference among themselves. The payment obligations of the Issuer under the Notes shall rank at least pari passu with all other unsecured and unsubordinated obligations of the Issuer, present and future, save only for such obligations as may be preferred by mandatory provisions of applicable law.
Especially surreal, because especially useless to any (normal) creditor. All that a future Ukrainian government would need to subordinate the owner of this technically English-law bond is a stroke of the legislator’s pen — changing its own laws to prefer somebody else.
After all, in its own interminable saga, Argentina of course has just filed a petition to the United States Supreme Court about an allegedly over-mighty pari passu clause which prevented similar operations using domestic legislation.
This loophole isn’t just in the pari passu clause of the Ukrainian bond. Let’s look at the negative pledge:
So long as any Note remains outstanding (as defined in the Trust Deed), the Issuer will not grant or permit to be outstanding, and it will procure that there is not granted or permitted to be outstanding, any Security Interest (other than a Permitted Security Interest) over any of its present or future assets or revenues or any part thereof, to secure any Relevant Indebtedness of Ukraine unless Ukraine shall (i) before or at the same time procure that the Issuer’s obligations under the Notes are secured equally and rateably therewith to the satisfaction of the Trustee or (ii) promptly thereafter ensure that the Issuer’s obligations under the Notes have the benefit of such other security as shall be approved by the Trustee in its absolute discretion or by an Extraordinary Resolution (as defined in the Trust Deed) of the Noteholders, being not materially less beneficial to the interests of the Noteholders.
How reassuringly verbose. But note the definition of permitted lien:
“Permitted Security Interest” means: (i) any Security Interest arising by operation of law which has not been foreclosed or otherwise enforced against the assets to which it applies; or…
Next, found among the seemingly dull technical language on carrying out payments of the bonds:
(b) Payments subject to fiscal lawsAll payments in respect of the Notes are subject in all cases to any applicable fiscal or other laws and regulations…
Which, again, would be an inviting target for an enterprising Ukrainian legislator. It was after all suggested before Cyprus’s debt crisis that the Nicosia government should use similarly ropey payments provisions in its foreign-law bonds to force a restructuring deal on holdouts. This didn’t happen, of course, but the language is there.
We could go on — it’s also worth carefully reading the waiver of sovereign immunity with respect to court enforcement of judgments after default. Still, the point is made. Russia must be very confident of its position. (Update: Obviously if “technicalities” don’t get in the way…) As the international community works to stop the violence and seek an exit from the crisis, we wonder about that.
One more thing meanwhile. These contractual provisions are more or less the same in other bonds of Ukraine, which are very much in private hands. Any bondholder must doubtless count on English-law protection of their claims, to back up an implicit bet that the country will pull through its crisis and avoid default. Given the prices of several such bonds plummeted to fresh lows on Wednesday, this would be a profitable bet if it pays off. And if investors have read their bond contracts…
Related links:
Yanukovych’s gamble and Kiev’s burning – In Moscow’s Shadows
Ukraine’s promise of peace overtaken by fresh tragedy – Timothy Snyder, FT
“Vladimir Putin’s worst nightmare” – New Republic
Yanukovych’s gamble and Kiev’s burning – In Moscow’s Shadows
Ukraine’s promise of peace overtaken by fresh tragedy – Timothy Snyder, FT
“Vladimir Putin’s worst nightmare” – New Republic
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