5. UKRAINE: A HYBRID EXCHANGE OFFER

5. UKRAINE: A HYBRID EXCHANGE OFFER

4-029 Ukraine became an independent state as a result of the collapse of the
USSR. It had to face its transition to a market economy while dealing with
the burden of a past that was characterised by bureaucracy and strong
political issues. Loose monetary policies led to fiscal imbalances that
resulted in hyperinflation. Although Ukraine honoured an agreement with
Russia not to inherit debts from the previous regime at the moment of its
independence, it did not take long to accumulate its own debt. The continuous
fiscal debt had to be financed by means of financing obtained from:
(1) Russia’s central bank; (2) international financial institutions; and (3)
short-term notes (OVDP).121
As of 1995, OVDPs were the main source of financing since monetary
financing and borrowing from official creditors declined.122 By 1997 more
than 50 per cent of the OVDPs were held by foreigners.123 Consequently,
Ukraine foresaw an international interest in their debt and in August 1997
issued its first Eurobond.
Since conditions deteriorated as a result of the pace of Ukraine’s structural
reforms and the spillover of the Asian crisis, the interest rates of the
OVDPs rocketed from 22 per cent to 45 per cent.124 Consequently, Ukraine
kept on accumulating more debt by means of new issuances of Eurobonds.
Obviously, the situation was aggravated by the Russian crisis which forced a
voluntary restructuring of the OVDPs. On September 4, 1998, the IMF
approved a US$2.2 billion Extended Fund Facility (EFF) to alleviate the
lack of external financing, establish a new exchange rate band and
restructure Ukraine’s debt.125
4-030 During 1998 and 1999 Ukraine restructured local debt and certain specific
external debt instruments to obtain debt relief. On February 4, 2000,
Ukraine launched a comprehensive exchange offer to restructure the following
outstanding bonds: (1) a €493 million bond issued on March 1, 1998


120 This rescheduling was made on terms more concessional that the “Houston” terms without
falling into “Naples” terms. 1 '
121 These short-term notes were known by their acronym OVDP, which stands for “obligations
of internal domestidMsbirowing” in Ukrainian. ‘ ,
122 Sturzenegger and ZettelmeySr,*'Z)e6i Defaults (2007), p. 11Y r~
123 See Olga Vyshnyak, “Twin Deficit Hypothesis: The Case of Ukraine”, National University
Kyiv-Mohyla Academy, available at http:ljeerc.kiev.ua/research/maiheses/2000/Vyshnyak_
Olga/body.pdf, p.33.
124 Sturzenegger and Zettelmeyer, Debt Defaults (2007), p. 119.
125 See International Monetary Fund, “IMF Approves Three-Year Extended Fund Facility for
Ukraine”, Press Release No.98/38, September 4, 1998, available at http://www.imf.org/
externaljnp/secjpr /1998¡pr9838.htm.
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with a 14.75 per cent interest rate and due in March 2000; (2) a DM 756
billion bond issued in tranches from February 26, 1998 with a 16 per cent
interest rate and due in February 2001; (3) a US$82 million bond issued on
October 20, 1998 with a 16.75 per cent interest rate and due in October 2000
(US$74 million outstanding); and (4) a US$500 million bond issued on
October 1, 1998 due in October 2000 (US$258 million outstanding).126
As previously explained Ukraine used an innovative hybrid mechanism
combining an exchange offer for all of the instruments with the use of CACs
in three of the bonds.127 Of the four outstanding bonds, one was governed
by German law and did not contain CACs and was therefore restructured
by a one-step exchange for the new bond. Bondholders of the other three
bonds, which contained CACs and were governed by Luxembourg law, were
invited to tender their old bonds and, at the same time, to grant an irrevocable
proxy vote to the exchange agent. The vote would be cast at a
subsequent bondholders’ meeting and would favour modifications to the old
bonds that would bring them into line with the payment terms of the new
bonds being offered in exchange. In contrast to the Pakistani bond
restructuring, the Ukraine made an innovative use of the CACs. Pakistan’s
bonds were governed by English law, but owing to the uncertainty of the
outcome of the bondholders’ meetings, the use of CACs was not triggered.
To overcome this uncertainty, Ukraine advocated the calling of the
bondholders’ meeting for the proposed amendments to the payment terms,
subject to the receipt of sufficient irrevocable proxies in favour of the proposed
amendments. On the receipt of sufficient proxies to amend the payment
terms of the original bonds, a meeting was called, the proxy votes were
taken and the amendments adopted, thereby making them binding on all the
bondholders of the three series. Subsequent to the meetings, the bondholders
participated in the exchange by tendering the modified bonds for
new bonds containing the amended payment terms. As noted by IMF
officials, “[ujsing a tender process permitted numerous additional modifications
of non-payment terms to be adopted without bondholders formally
having to accept each as an amendment to the old bond and ensured
that the four original issues were merged into two relatively large issues” .128
This groundbreaking technique of using CACs with the predicated
requirement of a majority of irrevocable proxies—the breach of which
entailed substantial civil liabilities—not only provided certainty that
bondholders who had tendered proxies would not backtrack and reject the
proposed amendments at the meetings, but also solved the holdout problem
feared by Pakistan. Even if dissenting bondholders refused to participate in

126 See Federico Sturzenegger and Jeromin Zettelmeyer, “Haircuts: Estimating Investor Losses
in Sovereign Debt Restructurings, 1998-2005”, IMF Working Paper 05/137 (2005) available
at http:llwww.imf.orglexternaljpubslftjwpl2005jwp05137.pdf.
127 IMF, “Involving the Private Sector” (above para.3-011 fn.57), p.9.
128 IMF, “Involving the Private Sector” (above para.3-011 fn.57), p.33.
4-031
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the exchange, they were still bound to the payment terms adopted by the
qualifying majority.
As in the case of Pakistan, Eurobonds, governed under English law, were
pre-emptively exchanged for new bonds, before any default. Holders of
Ukrainian international bonds were offered new international bonds with
seven year’s maturity. The principal amount of debt was agreed to be repaid
over six years after a year’s grace period—when only interest would be paid
on a semi-annual basis. The initial restructuring provided budgetary cash
relief with subsequent restructurings including all private sector claims due
in 2000-2002.
The exchange of Ukrainian’s Eurobonds is the only recent case where
CACs (in the bonds subject to English law in which they were included)
have been used to facilitate a restructuring agreement between the debtor
and the creditors. In the restructuring concluded in April 2000, the sovereign
debtor made use of the CACs present in four of its outstanding bonds.
Unlike the situation in Pakistan, where most bondholders were Pakistani
investors, the bonds were spread widely among retail holders, particularly in
Germany. Nevertheless, Ukraine managed to obtain the agreement of more
than 95 per cent of the holders on the outstanding value of debt. As in
Pakistan, however, this involved only the extension of principal maturities
rather than relief, since reorganisation was undertaken on a market-tomarket
basis.129
Ukraine gained enough “breathing space” to consolidate its economy and
implement the required reforms. The IMF’s EFF programme resumed and a
non-concessional Paris Club deal was achieved on July 13, 2001.
6. URUGUAY: THE GENERAL ACCEPTANCE OF CACS
Uruguay’s economy suffered a vast deterioration during 2002 and the
beginning of 2003 as a result of the 2001-2002 Argentine crisis. As previously
mentioned, the Argentine upheaval severely impacted on Uruguay
owing to the number of Argentine depositors in the Uruguayan banking
system. Uruguay portrayed its offer as a pre-emptive step to deal with a
serious liquidity problem before the situation could deteriorate into a fullfledged
default.130 Uruguay’s restructuring has been described by Beattie131
as one that is almost straight out of the US Treasury Wall Street rulebook of

129 See Nouriel Roubini, “Do we Need a New International Bankruptcy Regime?”, Brookings
Panel on Economic Activity, Fall 2002, available at http://www.stern.nyu.edu/gbbalmacrol
bankreg.doc.
130 Lee Buchheit and Jeremiah Pam, “Uruguay’s Innovations” (2004) 19(1) J.I.B.L.R. 28.
131 See Alan Beattie, “Uruguay Provides Test Case for Merits of Voluntary Debt Exchange”,
Financial Times, April 23, 2003, available at http://www.globalpolicy.org.
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