Ukraine's corporates use default threat to restructure loans

By bne IntelliNews April 3, 2015

Anna Kravchenko in Moscow -


Bondholders of Ukrainian companies are bracing themselves to accept some raw deals on their notes or come away empty-handed altogether. The military conflict in East Ukraine and the hryvnia’s 50% plummet against the dollar in 2014 have left few companies that are able to service their loans.

It's the same across the board. At the government level, Ukraine started consultations with holders of all state, state-guaranteed and quasi-state debt to restructure some $15bn of its $40bn debt in March. Russia made it clear that it will not make it any easier for Ukraine, stressing that its share in the obligations is official and not private, and must be paid in full by the year's end.

"We have stated our position several times and are not changing it," Finance Minister Anton Siluanov said. "We expect $3bn in December of the current year, as was promised by the Finance Ministry of Ukraine."

So the talks begin

Several Ukrainian companies, including VAB Bank, PJSC bank and major agricultural holding Mriya defaulted in 2014, and other bond issuers threaten to do the same in 2015. Ukraine’s state-owned Ukreximbank already started talks with its bondholders about changing terms of a $750mn debt repayment due in April. The bank will try to delay repayment for two months to win some time to negotiate debt restructuring. The sum comprises five-year bonds worth $500mn with a 8.375% coupon rate issued in April 2010, and $250mn of bonds with a 7.5% coupon rate issued in October 2010.

The bondholders will vote on the changes on April 9. Finance Minister Natalie Jaresko and National Bank of Ukraine (NBU) governor Valeriya Gontareva will participate in the negotiations since Ukreximbank’s notes are part of Ukraine’s external debt. The same goes for Oschadbank’s $1.2bn of bonds maturing in 2016-2018, and railway operator Ukrzaliznytsia’s $0.5bn of bonds maturing in 2018. These debts will be included in the debt operations together with other quasi-sovereign entities, the government said, adding that "each entity will undergo a separate process targeting its specific situation". Fitch downgraded the debt ratings of Ukreximbank and Oschadbank to CC from CCC on March 20 and noted that defaults by both banks on their external debt obligations now appear probable.

"Shameless" offer

Ukraine’s biggest mining company Metinvest and poultry producer MHP are also in talks on debts extension. Both companies’ assets are located in the war-ravaged Donbas region, so any re-escalation of the conflict may result in defaults. Least fortunate so far, however, are bondholders of Ukraine’s leading energy holding DTEK, who were presented with what some analysts have called an “explicit and shameless” choice to exchange $200mn notes maturing in April or face a default.

With the notes due for redemption on April 28, the company owned by Ukrainian businessman Rinat Akhmetov wants to exchange them for 20% in cash and the rest in new notes maturing in April 2019. These will have a coupon rate of 10.375%, compared to 9.5% for the existing notes. Another option for holders of 2015 notes is to exchange them for 2018 notes. Under both options, for each $1,000 of the existing notes, holders will receive $200 in cash and $800 in new notes, plus $20 in cash if they file their consent by April 8. Bondholders can accept the exchange offer or face a default, was the scenario explicitly laid out by DTEK.

Handouts are easier

A prime example of how not to face the music comes from state energy firm Naftogaz, which is saddled with debt but turns repeatedly to the government for bailouts rather than addressing the issue. Last year, Ukraine issued more than $6bn in local bonds to support Naftogaz, increasing internal debt as it maintains the company’s cash flow to fund gas imports. Another $2bn was promised at the beginning of 2015. Part of the Naftogaz debt will be included in Jaresko’s restructuring efforts to meet the terms of IMF loans.

More fallout likely

The Ukraine crisis is also causing ever greater anxiety for investors in other countries in the region with its anticipated knock-on effects.

“The US bank [JP Morgan] expects the rate of default among companies in emerging Europe to rocket to 8.6% this year, almost entirely driven by Ukraine,” the WSJ wrote on March 26.

Meanwhile, “Any Ukrainian company whose performance is strongly correlated to the performance of the economy is potentially at risk of default,” warned Zeke Diwan, senior portfolio manager at Allianz Global Investors.

The IMF's recently approved new credit programme for Ukraine envisages a $17.5bn emergency loan as part of $40bn in financial aid. All negotiations on restructuring $15bn of existing debt have to be finished by May, when IMF will check Ukraine’s compliance with the terms of the new programme.

While notable for its candour, Finance Minister Jaresko’s tour of Europe last month failed to placate fears that Ukraine is speeding toward a costly default on its government bonds. Concerns are growing about the likelihood of this outcome for companies too, with economists at this stage deeming a wave of corporate defaults as inevitable.

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