bne IntelliNews -

Ukraine's largest bank Privatbank has reached a conditional agreement with creditors on restructuring $200mn of Eurobonds due to mature on September 23, the bank said in a statement on September 8. 

The agreement is the first attempt at a major bond restructuring by private borrowers announced since Ukraine reached a restructuring agreement with sovereign Eurobond holders on August 27. But analysts view the deal as fragile, suggesting that Privatbank, part-owned by Ukrainian billionaire Ihor Kolomoisky, is not out of the woods yet.

According to the agreement, the repayment date of the September 2015 Eurobonds will be postponed until January 15, 2016. If Privatbank manages before January 5, 2016, to retructure a second issue of Eurobonds worth $150mn maturing on February 9, 2016, then the final maturity of the 2015 Eurobonds will be extended again - until January 23, 2018, with the coupon rate increased from 9.375% to 10.25%. 

All or nothing

But if no agreement is reached on the $150mn subordinated bonds, Privatbank must repay both issues, a term that evidently tipped the balance for many investors in favour of the deal.

"This new option sweetened the restructuring offer for the holders of the 2015 issue who rejected the previous offer two weeks ago," wrote analyst Mykhaylo Demkiv of Investment Capital Ukraine (ICU) brokerage in Kyiv, noting that the extraordinary resolution won overwhelming support by 96.94% of participants of a shareholders' meeting. 

"The new term gives a positive signal for the ultimate, longer restructuring of both issues as neither bondholder group will benefit from not supporting the proposal," Demkiv added.

Privatbank in a statement also applauded the broad investor support for the deal. "As soon as the agreement was declared, a group of investors headed by a Washington-based US fund declared their broad support for it. This fact was highlighted by some foreign media outlets, which positively assessed the investors' reactions to the deal," the bank said.

Inviting sabotage?

But some analysts say the both-or-nothing nature of the agreement creates an incentive for holders of the 2015 notes to sabotage the restructuring of the 2016 notes, in order to get repayment of the $200mn 2015 bond in January 2016.

"Now the holders of the $200mn in (2015) notes have a big temptation to prevent the smooth restructuring of the bank's (2016) $150mn in notes by the January 5 deadline," Aleksandr Paraschiy of Kyiv brokerage Concorde Capital wrote in a research note. 

According to Paraschiy, Privatbank's $200mn notes would yield 40% if they mature in 2018, and 221% if maturing in 2016. "Such a big difference between yields at different scenarios is a key risk for Privatbank," the analyst believes, since the bank will not have the funds to repay both the $200mn and the $150mn bonds at the start of 2016.

Kyiv brokerage Art Capital argue that if the restructuring succeeds, the restructured terms imply a yield of 42%, a spread of 2900 basis points to sovereign and quasi-sovereign bonds that Ukraine has restructured over the last few months.

"We consider this spread too wide for the largest private bank in Ukraine and expect narrowing after the entire restructuring process is finalised," Art Capital analyst Igor Putilin wrote in a research note.

Privatbank is the largest commercial bank in Ukraine in terms of the number of clients, assets value, loan portfolio and taxes paid to the national budget. However, the bond issue is only one of a series of issues plaguing the bank. In June, a Kyiv court ordered the bank to cooperate with a criminal investigation by the authorities for fraudulently diverting the equivalent of around $1.8bn.

Privatbank received the funds as stabilisation loans from the National Bank of Ukraine (NBU) as the February 2014 revolution and ensuing conflict with Russia unleashed economic turmoil in Ukraine. The funds were in turn paid to Privatbank by the central bank as part of an International Monetary Fund (IMF) bailout of Ukraine in May 2014.