Ukrainian MinFin restructures UAH 229 bln bonds due to central bank

The Ukrainian government has agreed with its central bank (NBU) to restructure UAH 229 bln of state bonds held by the NBU, the Finance Ministry reported on May 24. The new bonds will replace existing bonds in the NBU portfolio (part of a total UAH 378 bln held by central bank). The new bonds will mature in 2025-2047, and will have a coupon rate linked to inflation in Ukraine, according to MinFin.

According to Interfax-Ukraine, which cited explanatory documents for the restructuring, the government will exchange UAH 222 bln in existing bonds (yielding average coupon rate of 12.9%) and UAH 7 bln in accrued interest into new bonds. The new series of bonds will mature in nearly equal portions on May 10 and November 10 yearly over 2025 – 2047. They will pay coupons annually (also on May 10 and November 10), with the rate being equal to the 12-month trailing inflation rate in Ukraine plus 1.5pp (but total coupon will be not less than 1.5%). The first coupon period of the new note will start on the date of issuance and end in May or November 2018, depending on the issue.

According to government expectations, as cited by Interfax, the restructuring will allow the state budget to save UAH 10.1 bln on interest payments this year. On top of that, the government will not need to repay UAH 25.6 bln local bonds due this year. In the next year, the restructuring will result in higher coupon payments (by UAH 4.1 bln), while in 2019 and 2020 coupon savings will amount to UAH 14.5 bln and UAH 14.9 bln, respectively.

Alexander Paraschiy: The only tangible effect of such a debt restructuring is the UAH 10 bln savings of budget costs on interest payments in 2017. But this will result in problems for the budget next year already. First, the “economized” amount in 2017 will decrease the profit of the NBU by the same amount, which will result in about the same under-payment of NBU profit to the budget in 2018 (the distribution of NBU profits is important component of budget revenue, contributing about 4-5% of the total). Second, next year’s budget costs will increase by about UAH 4 bln because of higher coupon payments. Another positive effect from the restructuring is the decrease of the government’s need to refinance about UAH 170 bln in bonds that will mature in 2017-2020, but refinancing via the regular issue of new bonds was never a problem for the government.