Templeton Cedes Ground on Ukraine Writeoff as Debt Payment Looms
Franklin Templeton has come to grips with the fact that it won’t be able to avoid losses on its $7 billion investment in Ukrainian bonds.
The investment firm and three other bondholders this week offered the eastern European nation a small amount of debt relief, the first time they’ve entertained the possibility of a writedown on their principal holdings. The size of the so-called haircut they proposed is 5 percent, a person familiar with the negotiations said on Thursday. That compares with the 40 percent Ukraine was said to have asked them for last month.
While investors are hailing the offer as a step toward ending a standoff, Ukraine is running out of time to get a deal in place before its first Eurobond matures Sept. 23. The nation needs to alter terms on $19 billion of debt as a condition for International Monetary Fund aid aimed at pulling the economy out of a recession that’s deepened in the 16 months since a battle with pro-Russian separatists started in the east.
“The creditors have bitten the bullet,” Jakob Christensen, an analyst at Exotix Partners in London, said by e-mail on Thursday. “It’s give and take from here, so a compromise is probably the most realistic. I don’t think the IMF and the government will be satisfied with a small principal haircut. They will need more like 25 percent.”
Trading in the bond market suggests investors are optimistic the creditor group -- which owns $8.9 billion of the nation’s debt -- will convince the government to back down on its demands for big losses. The sovereign’s $2.6 billion of notes maturing in July 2017 rallied 8.1 cents on the dollar this month to 56.64 cents by 8:22 p.m. in London on Thursday, including a 0.69 cent advance for the day.
Other Conditions
The restructuring deal will probably end with a principal cut of about 35 percent and a 4 percent reduction in interest payments, analysts at Oxford Economics including Evghenia Sleptsova said in a research note on Tuesday. Bonds are currently pricing in a haircut of less than 35 percent, they said.
While the 5 percent writeoff represents a concession, the bondholder group’s proposal is subject to a number of preconditions and other detailed terms, according to a second person with knowledge of the talks. Both asked not to be named because the talks are private.
Until now, creditors insisted losses on principal weren’t needed to meet the conditions of the IMF’s $17.5 billion loan. Their earlier offer focused on pushing back due dates and reductions in interest payments. BTG Pactual Europe LLP, TCW Investment Management Co. and T. Rowe Price Associates Inc. are also part of the committee.
Writedown Size
The group has said the burden of granting Ukraine debt relief is unfairly falling on their shoulders, noting in a June 24 letter that less than 30 percent of the nation’s $70 billion of public and publicly generated debt was being identified for losses.
The government, by contrast, pointed to the state of the economy and finances in its plea for a break on the debt it owes. Gross domestic product is poised to shrink 8.5 percent in 2015, the biggest drop in Europe, the Middle East and Africa, according to forecasts compiled by Bloomberg. Foreign-currency reserves at about $10 billion are less than half what they were at the end of 2013, before Russia’s annexation of Crimea sparked the separatist conflict.
If the two sides fail to finalize an agreement by the time of the second IMF review in mid-September, Ukraine may withhold payment of debt due that month, analysts at Moody’s Investors Service including Kristin Lindow said in a research note on July 27.
Ukraine is proposing a direct meeting with creditors next week, the first person said. The $500 million note due Sept. 23 rose 0.38 cent to 57.96 cents on the dollar on Thursday.
With creditors agreeing to a haircut “they crossed the bridge, they only have to discuss the size,” Lutz Roehmeyer, who helps oversee $1.1 billion of assets, including Ukrainian bonds, as a money manager at Landesbank Berlin Investment, said by e-mail on Thursday.
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