Investors claim power to block Ukraine debt deal

By bne IntelliNews September 18, 2015

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A group of holders of Ukraine's shortest-dated bonds who oppose the government's August deal with a creditors committee on restructuring some 18bn in Eurobonds, claim to own the 25% stake needed to block the debt operation.

Shearman & Sterling, the law firm representing holders of the $500mn Eurobond due on September 23, said on September 17 they can now thwart the 20% write-down and other terms Ukraine's finance minstry agreed with a group of investors represented by Franklin Templeton company, Bloomberg reported.

Appearing on the same day Ukraine's parliament approved the debt restructuring, the statement appears to jeopardise the much-celebrated August deal, and compounds the government's predicament after Russia refused to consider any restructuring of its $3bn Eurobond bought in 2013. Moscow insists on full repayment when the two-year obligation expires in December 2015.

On August 27, Ukraine announced that it had secured a nominal deal with international private creditors on restructuring their bonds. As well as the 20% writedown of the face value of the notes, the Templeton led investors agreed to maturity extension to 2019-2027 from 2015-2023, and a uniform coupon rate of 7.75% (compared with 4.95-9.25%).

However, the group represented by Shearman & Sterling is seeking to change the allocation of the new securities so that its payments are delayed for approximately four years.

According to previous media reports, the amount outstanding of the two shortest Eurobonds is $1.17bn, or 6.5% of the total sovereign Eurobonds that were to be restructured. According to Shearman & Sterling, all bondholders should get identical packages of the new bonds. But the group holding the shortest-dated bonds consider this unfair as it would defer the average maturity by more than eight years for the bonds due in 2015 and only half a year for those due in 2023.

Ukrainian Finance Minister Natalie Jaresko insisted on September 11 that opposition from minority holders of the 2015 bonds will not affect the restructuring deal. "As far as I know, they are in contact with members of the [ad hoc] committee [of private creditors]. They are not in contact with us," Jaresko said.

According to an unnamed source quoted by Bloomberg, bondholders must be given at least 21 days notice before a vote can be called, and 75% of the investors need to vote in favour at a meeting at which two-thirds of the creditors are represented. The Franklin Templeton group also has a blocking stake in the September 23 note.

IMF dawdles at the crossroads

The International Monetary Fund (IMF) has not yet made a decision on the status of the 2013 $3bn Eurobond issued by Ukraine and held by Russia, Communications Department director Gerry Rice told journalists on September 17 in Washington.

"I can only reiterate what we've said before, which is that our executive board is responsible for establishing the status of the bond, of this bond, and has not made a decision on this," Rice said. Ukraine "has made the latest payment on that bond; that was in June. So, you know, there are no arrears to Russia," Rice added. "The next payment is not due I believe until the end of the year, December, so it's not pertinent right now."

On September 6, IMF chief Christine Lagarde told journalists in Kyiv that the lender will soon determine the bond's status. On the same day, Ukrainian President Petro Poroshenko said Russia will not "under any circumstances" get better conditions on the debt restructuring than the other private investors.

A day later, Russian Finance Minister Anton Siluanov said again that Russia's debt should be considered as sovereign, not private. "Regarding sovereign debts, there is a special procedure to settle such cases. We will not enter into negotiations with the Ukrainian government on this matter," Siluanov said.

Meanwhile, the IMF's lack of action on defining the bond's status is not helping Ukraine's cause, notes analyst Alexander Paraschiy of the Kyiv investment firm Concorde Capital.

"What Rice has said about the status of the 'Russian' USD 3 bln Eurobond adds us more certainty that the IMF wants it to be restructured," the analyst wrote in a note to clients. "To increase the chances for its smooth restructuring, the IMF needs to explicitly declare it as a private loan as soon as possible. The lack of a timeline for such a decision is the key risk for Ukraine’s debt operation to be finalized on time.

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