Kyiv city bondholders officially reject restructuring offer

The ad hoc committee of the holders of Kyiv city Eurobonds (CITKIE) issued an official letter rejecting last week’s restructuring proposal, Bloomberg reported on Nov. 10. The committee members hold 38% of the city’s USD 250 mln notes due Nov. 6, 2015 and 22% in USD 300 mln notes due on July 11, 2016. The committee believes the offered restructuring terms “do not represent the fair value of the holders of City’s notes,” its members wrote. They call for a “balanced proposal” from the city and Ukraine’s Finance Ministry. The ad hoc members refused to identify themselves, Bloomberg reported.

Recall, last week MinFin offered an exchange of municipal bonds into a set of 75% in government bonds (UKRAIN) with a coupon rate of 7.75% maturing in 2019 and 2020; and 25% in Ukraine’s GDP warrants. Earlier, the holders of USD 15 bln in Ukrainian sovereign bonds approved an exchange into a set of 80% in new notes (with the same coupon of 7.75%, and maturing 2019-2027) and 20% in GDP warrants.

Alexander Paraschiy: The official refusal is an expected event, given that MinFin reported last week the committee hadn’t accepted the terms.

It’s not a big deal for MinFin to offer slightly better exchange parameters – e.g. 80/20 in notes and warrants, instead of 75/25. Such revision would only cost the budget USD 27.5 mln in an extra debt repayment in 2019-2020, or 0.8% of total Ukraine’s repayments in these two years. However, we understand that in MinFin’s eyes, the latest proposal looks well-balanced as it offers an “upgrade” in the status of a municipal bond to sovereign level, as well as a smaller maturity extension (to 2019-2020) as compared to what most of the holders of sovereign bonds accepted (to 2019-2027). In return, MinFin is trying to secure a little bit higher “haircut.”

The holders of CITKIE bonds don’t look to be happy in getting new bonds with a smaller coupon rate (7.75% vs. the current average of 8.75%), unlike the holders of UKRAIN bonds, with an average coupon of 7.22%, who are getting new bonds with an increased coupon rate. On top of that, they are very unlikely to see any benefits in an “upgrade” of the status of their bonds to sovereign level.

The key argument of MinFin in its talks with CITKIE holders could be that the municipal notes were always priced with a discount to the sovereign bonds of the same maturity. Thus, their exchange into sovereign bonds should reflect this price differential, e.g., via a bigger haircut.

At this stage, we see little reasons for MinFin to change its position, although, again, it won’t cost much for the government. As alternative option, MinFin could try to offer CITKIE bondholders similar restructuring conditions to what has been approved by UKRAIN bondholders, meaning a 20% haircut and maturity extension to 2019-2027.