(Bloomberg) -- Ukraine reached a deal in principle with some of its private creditors to restructure more than $20 billion of international debt, in a move that will help the country finance its fighting against Russia.
The nation’s debt traded at the highest in two years, showing investor optimism that the intial agreement will get a final go-ahead from stakeholders. The bondholders’ committee accepted nominal losses of 37% of their holdings across 13 notes, forgoing $8.67 billion of claims, according to a statement with the terms of the accord. Ukraine anticipates saving $11.4 billion in the next three years by a combination of lower coupons and maturity extensions.
“Once completed, this restructuring will also pave the way for Ukraine’s market re-entry as soon as possible when the security situation stabilizes to fund our country’s swift recovery and reconstruction,” Ukrainian Finance Minister Serhiy Marchenko said in a separate statement.
Ukraine’s dollar bonds advanced across the curve after the announcement of the deal and were the top gainers in emerging markets on the day. The note due in March 2035 added more than 5 cents on the dollar to around 33 cents as of 11:48 a.m. in London.
Necessary Votes
“As long-term investors in Ukraine, we are pleased to be able to provide significant debt relief to Ukraine, assist its efforts to regain its access to international capital markets, and support the future reconstruction of the country to the benefit of the Ukrainian people,” the ad hoc creditor committee said in a separate statement.
The agreement in principle was reached with the creditor committee that included Amundi SA, BlackRock Inc and Amia Capital LLP, as well as other investors, who together represent around 25% of the bonds. At least two-thirds of all bondholders will need to approve the agreement to finalize the debt restructuring deal.
“I think they will get the necessary votes,” said Viktor Szabo, an EM fund manager at Abrdn Plc, who holds Ukraine sovereign bonds. The government moved closer to the original bondholder proposal in terms of recovery value than expected, Szabo added.
Ukraine imposed a freeze on foreign debt payments two years ago after Russia launched its full-scale invasion. That freeze expires on Aug. 1 with a coupon payment on a bond due in 2026, and the government in Kyiv needs to restructure the debt in line with the International Monetary Fund’s requirements amid a $15.6 billion program. Both the IMF and the country’s bilateral creditors, which include the US and the Paris Club, have signed off on Ukraine’s proposals, according to the statement.
The government and the creditors agreed to restructure the claims into two sets — Bond A and Bond B — a similar structure used in Zambia’s debt rework. The Bond B works as a future incentive for bondholders as it will offer higher payments if Ukraine’s 2028 nominal growth domestic product is 3% higher than what the IMF projects for that year. This one-time test will be conducted in 2029.
Step-up coupon payments for new notes issued under Bond A are set to kick off in 2025 at 1.75% and will reach as much as 7.75%, with capital payments starting in 2029.
GDP Warrants
The first round of talks between Ukraine and international investors, held in June, failed to yield results. The eastern European nation was pushing investors to accept bigger losses to meet the IMF’s demands. Lawmakers in Kyiv this month approved a new law that allows the government to impose a temporary ban on foreign debt payments until October.
The legislation provided flexibility before the agreement in principle with creditors, according to the Finance Ministry.
Ministry officials told bondholders earlier this month that the country would include a treatment of $2.6 billion in GDP-linked warrants in the debt rework, along with its outstanding sovereign bonds. The warrants were issued as a sweetener during Ukraine’s 2015 debt restructuring.
For now, an agreement on the warrants was not reached, though the government will continue talks with holders. The parties agreed on removing a so-called cross default clause between its international bonds and the warrants maturing in 2041, whose payments are linked to economic growth. A cross-default clause means default on one instrument carries over to others.
“The exclusion of the GDP warrants from the agreement is understandable due to its deep complexity, it’s relatively small notional outstanding size compared to the rest of the conventional sovereign bond curve, as well as the urgency of the impending standstill deadline,” said Paul Greer, a fund manager at Fidelity International Ltd.
The IMF approved a loan to Ukraine in 2023 in an unprecedented move: the first such loan to a country at war in its almost 80-year history.
The program envisaged the fighting with Russia will start to settle down by the end of this year. However, with Russia ramping up attacks, Ukraine’s government has been forced to increase military spending. The government aims to raise around 500 billion hryvnia ($12 billion) in additional revenue for urgent military expenditures this year by raising taxes.
--With assistance from Volodymyr Verbianyi, Kerim Karakaya and Deana Kjuka.
(Updates with bond gains in fourth paragraph, investor quotes)
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