Ukraine Shielded From Vultures by Templeton Has One Less Problem
or all Ukraine’s challenges in negotiating relief on $23 billion of debt, at least one thing is going in its favor: vulture funds can’t get their claws in.
The east European nation is dealing with Franklin Templeton and four other creditors who together hold more than half of its international sovereign bonds. That’s 25 fewer than in the investor committee that Greece dealt with in 2012 negotiations. Unlike Argentina -- still battling so-called holdout creditors from five years ago -- Ukraine has collective-action clauses on its debt, imposing a deal reached by the majority on all bondholders.
“The structure of Ukrainian bondholders can simplify the restructuring process if there is an agreement with a few large bondholders,” Vadim Khramov, an emerging-market economist at Bank of America Merrill Lynch in London, said by e-mail on Thursday. “It would be very hard for vulture funds to get money out of this situation. Normally you wouldn’t expect that the bondholder committee with five members could have a large stake.”
While analysts are still skeptical Ukraine will reach a deal by the May deadline under a $40 billion International Monetary Fund bailout package, its dollar bonds have rallied the most in emerging markets in the past month on the prospect of eventual agreement. The nation’s debt was the world’s worst performer in the past year as a war with pro-Russian separatists in the nation’s east crippled the economy.
Sovereign Majority
The Templeton-led group holds about $10 billion, or 43 percent, of the $23 billion of bonds and enterprise loans being restructured by Ukraine. That goes up to almost 60 percent once a $3 billion bond sold to Russia and eight securities from state-owned companies worth $3.3 billion are stripped out, leaving 20 bonds with a face value of $16.7 billion.
Restructuring negotiations take place on a bond-by-bond basis and the creditor group probably holds enough to get the required two-thirds majority to push through an agreement on most of the sovereign debt, according to Khramov.
Spokespeople for the group and for Templeton both declined to comment on the holdings of its members or their outlook for the negotiations. The creation of the creditor committee should lead to a “speedy resolution” of the restructuring process, it said in an April 8 statement. It has previously declined to name the other four creditors.
Russia, which bought its $3 billion bond from Ukraine in December 2013 when pro-Moscow president Viktor Yanukovych was in power, says it will seek arbitration if Kiev doesn’t repay the debt when it comes due in December.
Principal Writedown
The $3.3 billion of bonds from The State Import-Export Bank of Ukraine, known as Ukreximbank, AT Oschadbank and Ukrainian Railways will be treated differently from the sovereign debt because they don’t have state guarantees. Ukreximbank has already made an offer to holders of some securities that doesn’t involve a principal writedown, something that sovereign creditors have been told they will be forced to swallow.
A creditor committee of three hedge funds, including VR Global Partners LP and GLG Partners LP, has agreed to accept higher coupons and longer maturities on $750 million of Ukreximbank notes that mature on Monday.
The Templeton-led group’s majority holding in the sovereign tranche of the restructuring is a “mixed blessing” for Ukraine, according to Anna Gelpern, a Georgetown University law professor and fellow at the Peterson Institute for International Economics.
‘Extraordinary Power’
“It gives these people extraordinary power, but on the other hand if you have them, you have much less work to do in rounding up the rest,” she said by phone on Thursday.
Ukraine’s $2.6 billion of bonds maturing July 2017 have rallied 7 cents this month on optimism that a deal may be reached after favorable terms were offered to Ukreximbank creditors. The securities were little changed at 46.58 cents on the dollar at 10:46 a.m. in Kiev on Friday.
The government needs to reach a deal with bondholders by the end of May to qualify for the next tranche of its $17.5 billion IMF loan.
Greek bondholders ended up accepting a 53.5 percent reduction on their principal in February 2012, seven months after agreeing to a 21 percent loss. State-controlled Dubai World reached a second restructuring of $14.7 billion of debt this year after cutting coupons and extending maturities in 2011 and failing to reach a standstill in 2009.
“The bondholder committee is likely to push to activate the collective action clauses and then the whole deal would be done,” Bank of America Merrill Lynch’s Khramov said. “Vulture funds can’t get a big enough majority to block a decision, so there’s no point in getting involved.”
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