Ukraine initiates Eurobond restructuring, introduces moratorium

The Cabinet of Minister of Ukraine issued a Sept. 22 resolution to approve the conditions of the restructuring of all sovereign (UKRAIN) and guaranteed (UKRINF) Eurobonds, according to its website. The restructuring should be completed by Dec. 1, 2015, according to the government resolution.

The Cabinet also imposed a moratorium on any Eurobond payments that are due between Sept. 23 and Dec. 1, including redemption of USD 500 mln notes on Sept. 23 and EUR 600 mln notes on Oct. 13, as well as coupon payments on five sovereign and two guaranteed Eurobonds. In its press release, the Finance Ministry stated that the moratorium will lead to “technical” and “temporary” reductions in the ratings of all the notes, which will be upgraded after the restructuring is completed.

Individual meetings of the holders of all the 14 Eurobond issues (including the USD 3 bln Eurobond bought by a Russian state fund) are scheduled for Oct. 14, with a quorum of 2/3 of each bond outstanding. If the quorum won’t be reached, any meeting can be adjourned (which will require 1/3 quorum) for 14-42 days (likely on Oct. 29) and one more time for 14+ days. The acceptance rate at all the meetings is 3/4 of votes present.

The success of Ukraine’s economic program “critically rests on support from Ukraine’s creditors,“ IMF Managing Director Christine Lagarde wrote in a letter to financial community the same day. “High participation by all concerned Eurobond holders in the upcoming debt exchange is paramount, since Ukraine lacks the resources under the program to service its debts on the original terms. Together with the authorities and the ad hoc creditors committee, I call on all creditors to support this offer.”

“The legislation gives priority to the restructured debt over debt that wasn’t involved in the proposed debt operation, which should prompt creditors to participate in the restructuring, which is obviously advantageous for everyone,” MinFin stated in its press release.

Recall, as agreed with ad hoc creditors committee in late August, Ukraine is going to exchange all its sovereign and guaranteed Eurobonds (maturing in 2015-2023) into an equal set of nine new Eurobonds maturing in 2019-2027, with a 7.75% coupon rate. The exchange will also assume a haircut of 20% on all the debt, in exchange for GDP warrants.

Alexander Paraschiy: While there is no doubt that the holders of the longer Eurobonds (maturing in 2016-2023) will smoothly approve the restructuring, the risk remains that holders of the shorter bonds will try to oppose the deal. We see a small risk that the holders of the Eurobonds maturing on Sept. 23 won’t approve the deal. Though, it’s highly unlikely that the Russian government, indirectly holding the entire issue of USD 3 bln notes maturing in December, will accept it. We hope that the IMF board will make a decision by Oct. 14 to define the status of this “Russian” bond as a private loan – that would be more helpful for Ukraine in its talks with the Russian lender than any letters from top IMF managers.