Ukraine plays hard ball with private creditors

By bne IntelliNews April 20, 2015

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Ukraine is ready to play hard ball in its bid to restructure $15.3bn in foreign debt, was the signal sent by Finance Minister Natalie Jaresko to corporate bondholders in Washington on April 17.

The government wants to secure a $40bn bailout package assembled with the International Monetary Fund (IMF) and other institutions in March, but under the bailout terms, disbursals are contingent on successful debt restructuring.

The Ukrainian delegation kicked back the first proposal by a group of five creditors led by Franklin Templeton. Together the creditors own around $10bn of Ukrainian debt.

"The creditors’ proposal only includes maturity extension". This "wouldn't meet all [the IMF] programme aims", Jaresko said in her first comments about the meeting. Ukraine's debt payments through 2019-25 cannot on average exceed 10% of its GDP, she said, further tightening negotiating space with creditors. 

Kyiv has to reach an agreement by the end of May to save $15.3bn over four years, as a condition for receiving the next tranche of a $17.5bn IMF loan. The hope is that a combination of debt writedown and maturity extension will be enough to hit the target sum, but the clock is ticking faster than Ukraine has so far shown that it can act.

"I’m confident that the creditors will see that it's in all of our interests to agree to a standstill and let us have the time," Jaresko said. Then all sides can "move forward with the rest of the restructuring in a fair and transparent fashion".

Franklin Templeton is Ukraine's biggest bondholder with about $7bn of debt, followed by the Russian government, which is demanding repayment of its $3bn Eurobond by the December maturity. 

Ukraine has to pay about $10bn to service its debts this year, including corporate and sovereign loans and bonds, with the total debt amounting to $50bn.

The country's US-born finance minister Jaresko says "we have no right to fail" in the restructuring that is urgently needed to rescue its collapsed economy. But the private creditors are also digging in their heels hard to protect their bonds, with dire possible consequences, commentators warn.

"The refuseniks among Ukraine's foreign creditors are engaged in a perilous game of brinksmanship," David Clark, head of the Russia Foundation, wrote in the Financial Times. "If a refusal to negotiate drove Ukraine to default, blame would fall entirely on the shoulders of intransigent creditors."

Russian spanner in the works

Amid wrangling over whether Ukraine's debt is corporate or sovereign, Russia insists that its $3bn Eurobond bought in 2013 is official, although it was not registered as such with the Paris Club of creditors. Ukraine argues the opposite.

Following the talks in Washington, Russian Finance Minister Anton Siluanov again said restructuring of the bond should be regulated by Paris Club mechanisms, rather than the London Club mechanisms applied to private investors.

"Any speculations regarding the debt's status are simply inappropriate," Siluanov told journalists in Moscow. The minister stressed earlier that he expects Ukraine to fulfil its obligations, and if it doesn't, Russia will go to international courts. He said also Jaresko had assured him that Ukraine's 2015 national budget made provision for repaying the debt to Russia.

The Eurobonds were issued in December 20, 2013, and traded on the Irish Stock Exchange. Purchased with money from Russia's National Welfare Fund, they were part of a scuppered $15bn aid package for Ukraine that Russian President Vladimir Putin agreed with former Ukrainian president Viktor Yanukovych at the end of 2013, before pro-EU protests in Kyiv toppled Yanukovych in February 2014. 

Yanukovych, whose circle is accused of siphoning off huge amounts of state money, now lives in exile in Russia. But the legacy of corruption now threatens to torpedo the restructuring drive. 

"The political mood in Kiev is darkening, with influential voices in parliament and the government increasingly moving towards the option of a sovereign default," added the Russia Foundation's Clark. “Few Ukrainians feel any moral compulsion to settle the debts of a Yanukovych regime that defrauded the nation, or to pander to those who sought profit by doing business with it."


The Ukrainian delegation also included Oleksandr Hrytsenko, the head of Ukraine’s state-owned Ukreximbank, which is also battling against the clock to restructure its $750mn Eurobond maturing on April 27. The bank recently informed bondholders that it will restructure the obligation by extending its maturity with no writedown of interest or principal.

The bank had previously asked for an initial three-month postponement of maturity, allowing the bond to be included in the overall process of restructuring Ukraine's sovereign debt, which the IMF says must be completed by June.

Still called default

But Ukraine's funding problems will not be solved even if the government succeeds in restructuring the target $15.3bn of foreign debt, according to the rating agency Moody's. The planned restructuring of its Eurobond will qualify as a distressed exchange, which is still a default by Moody's definition.

Debt restructuring is the second largest source of outside financing for Ukraine's IMF programme agreed in March. The Fund itself brings $17.5bn over four years; $9.6bn comes from governments and multilaterals (including Europe, the US and China).

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