Ukraine’s Cabinet hikes interest rate on Russian loan 3pp to 9.5%

The Ukrainian government disclosed a Dec. 4 resolution that stipulates an increase in the interest rate on an “international loan” to 9.5% from December 13. The original resolution, adopted on August 21 and foreseeing an interest rate of 6.5%, enabled Ukraine to receive a syndicated loan for USD 750 mln, arranged by Russian Sberbank CIB,in September 2013. The loan has been issued for “up to two years,” according to the government decree. All other loan details are unknown.

Alexander Paraschiy: As the details on the loan deal are not known, we only can list the possible lending conditions that may require the government to revise the interest rate on the loan each quarter. One of the explanations is the revision might be linked to some market rate of Ukraine’s debt, for instance, government Eurobonds that have the same maturity as the syndicated loan (September 2015). The YTM on these notes increased to 13.2% on December 4 from 8.3% on August 21. Another explanation is the syndicated loan has an embedded put option: usually, the debt agreements that have a put option also contain the possibility for the borrower to revise its interest rate.

The latter explanation looks probable, given that the government in its Aug. 21 decree stated that the loan should be taken for “up to” two years (thus implicitly allowing an earlier redemption). And it makes sense given the latest developments in Ukraine. In particular, a risk that Russian banks (providers of the USD 750 mln loan, acting on behalf of Vladimir Putin, as the Russian president stressed at one of his press briefings) may ask for early redemption on the loan might have been one of the arguments for Ukrainian President Viktor Yanukovych to avoid signing the Association Agreement with the EU at the Vilnius summit in late November.