MinFin agrees to new restructuring terms of debt to central bank

The Ukrainian government approved new restrucuturing terms
of its local bonds that are held by the central bank, the Finance Ministry
reported on Sept. 4. Based on the new deal, the central bank will agree to
restructure local currency sovereign bonds of a total par value of UAH 219.6
bln (about USD 8.3 bln), of which UAH 159.5 bln mature in 2017-2020.

After the restructuring, the bonds will mature every
six months between May 2025 and November 2047. For the bonds that mature in
2025-2035 (about UAH 74.4 bln outstanding), a coupon will paid on semi-annual basis
and will be in the range of 11.30% (for the shortest one)
to 8.12% (for the longest one). For the bonds maturing in 2036-2047 (UAH 145.2
bln outstanding), coupons will be paid annually at a fluctuating rate equal to
12M trailing CPI plus 2.2pp. The first coupons on all the bonds will be paid
next year.

Recall, in May 2017, MinFin and central bank were close to agreeing to
the restructuring of UAH 229 bln in bonds with their maturity shifting to
2025-2047  (similar to the new deal), but with a coupon equal to annual
CPI + 1.5pp for all the bonds. However, the parties were not able to finish the
restructuring on those terms, and the Cabinet ruled to cancel the dealon Aug. 9.

Alexander Paraschiy: As we
commented before, the government might have been afraid of a high inflation
rate in the coming periods (which would inflate coupon payments next year),
which seems to be the key reason for the failure of the previous deal. This
time, the government secured fixed coupons for some of the new bonds, but it
had to sacrifice a higher coupon rate (CPI + 2.2pp instead of CPI + 1.5pp) for
the rest.

Overall, the debt operation will only allow MinFin to
save some of the budget costs this year (about UAH 7 bln in a coupon payment
that will be shifted to next year), which, however, will result in a respective
drop in income of the central bank in 2017, and may result in a respective
decrease of distribution of central bank’s income to the budget next year.
Therefore, the positive fiscal effect will be only seen in 2017.

The deal will reduce MinFin’s bond repayment needs by
UAH 11 bln in 2017, UAH 46 bln in 2018 and UAH 67 bln in 2019, which looks
positive. On the other hand, MinFin never had trouble in refinancing its local
bonds on the domestic market.

All in all, we do not see clear benefits from the
debt operation for the budget beyond the year 2017. Moreover, the precedent of
restructuring local bonds (which Ukraine hasn’t done in recent years) is not a
good signal for the local bond market, in our view.