Ukraine bondholders slap down haircut calls as debt showdown peaks

By bne IntelliNews June 17, 2015

bne IntelliNews -


International holders of billions of dollars of Ukrainian Eurobonds firmly rejected any justification for a reduction of the principle debt in a statement on June 17 - also the due date for a $39mn Eurobond coupon payment by Kyiv on a $1.25bn Eurobond maturing in 2016. 

Cutting the principle was "not the right way", the statement said, adding that a so-called haircut on the obligations "sends the wrong signal to global capital markets when Ukraine can least afford to be shunned".

Meanwhile, Ukrainian Finance Minister Natalie Jaresko indicated Kyiv would make the coupon payment on June 17 despite the creditors' rejection of her terms. "A decision by the Cabinet is needed to halt the payments. I cannot [do it] on my own," she said on the sidelines of a government meeting, as quoted by Interfax Ukraine.

Attempts to resolve the debt issue - previously thought to be crucial to Ukraine's agreement with the International Monetary Fund (IMF) for continuing a $17.5bn bailout package - foundered in recent weeks, with private creditors refusing to shift on the haircut demand and insisting that Ukraine can afford to pay them in full.

Backed up by the IMF, the government in Kyiv says it can only cover the debt by using central bank reserves, which is illegal. Its hand was strengthened further in June when the Fund said it would keep lending to the former Soviet republic even if it did not restructure the debt.  

Meanwhile, Ukraine is threatening to make use of legislation introduced in May that allows the government to declare a moratorium on debt payments. Jaresko again raised the possibility on June 16.

"If we fail to bring our lenders to the negotiating table, apparently we shall keep in mind the leverage we've got from parliament - the right to decide whether to suspend payments or not," the finance minister said.

The ad hoc committee of private creditors, including T Rowe Price, TCW, Franklin Templeton, and BTG Pactual, say their proposals for restructuring without any haircut would still meet a key IMF requirement that Ukraine reduce its debt payments by $16bn over the next four years. According to the investment funds, Ukraine's future coupon payments would correlate to its achievement of certain GDP growth indicators.

They also argue that a debt haircut would limit the county's future access to credit, and is simply not necessary because Ukraine's problems do not derive from overall debt levels, but lack of liquidity.

According to the bondholders, the restructuring proposed by Ukraine would only extend to the $22bn in private foreign debt they hold, whereas Ukraine's total sovereign debt including intergovernmental foreign debt and domestic debt run to $70bn.

The committee said in the statement that it had "gone out of its way to offer a proposal that is sympathetic, and delivers long-term benefit to all sides. We would like to see other creditors assume similar responsibility." 

However, Ukraine's finance ministry called the debt restructuring proposals of the private creditors "unacceptable" in a statement issued on June 5. 

Meanwhile, the coupon payment due on June 17 should be followed by a $75mn Eurobond coupon payment to Russia on June 22 to service the $3bn Eurobond it bought from Ukraine in December 2013. This was part of a bailout of Ukraine during the presidency of Viktor Yanukovych, who was ousted from power in February 2014.

Russian President Vladimir Putin on June 16 criticised Ukrainian threats to default on the two-year Eurobond, and warned that Kyiv may now be held to stringent terms of the bond that Moscow has not yet insisted on being enforced. "Now that Ukraine's aggregate foreign debt has exceeded 60% of GDP, we are entitled to call in this money early," Putin said.

"We are not doing this, considering a difficult economic situation in the country. But we hope to receive this money, as is stipulated by the relevant agreement," he added, as quoted by Interfax.

Ukraine is insisting the $3bn bond is private and not official, allowing it to be subject to restructuring along with the country's other Eurobonds. Comments from both sides became increasingly abrasive in recent days, with Ukrainian President Petro Poroshenko calling the 2013 bond a "bribe" to Yanukovych for keeping Ukraine away from the EU.

Moscow was quick to retort. "If the $3bn Russian loan to Ukraine was a bribe, as Mr Poroshenko has called it, then the billions negotiated by Ukrainian leaders with the International Monetary Fund are grand larceny," Russian Prime Minister Dmitry Medvedev wrote on his Facebook page.

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