Kyiv city intends to restructure its Eurobonds

The Kyiv City Council voted on March 4 to initiate a restructuring of its Eurobonds (CITKIE), the Interfax news agency reported. This decision concerns both issues of its Eurobonds (USD 250 mln maturing in November 2015 and USD 300 mln maturing in July 2016), according to Interfax.

Alexander Paraschiy: This is first time we are hearing something from the city on its restructuring intention. While the city’s Eurobonds have no direct link to Ukraine’s sovereign debt (Kyiv’s Eurobonds are not guaranteed by the state), our understanding is that the city will attempt to initiate restructuring of its debt in one package with the sovereign bonds.

That changes our view on the probability that the Finance Ministry will ask for a restructuring of the state’s shortest Eurobonds (maturing in September and October of 2015). Earlier, we saw a high likelihood that these bonds won’t be restructured.

The parameters of Kyiv city’s Eurobond restructuring offer (as well as for a possible sovereign restructuring offer) have not been disclosed. Some rumours have reached us indicating that the city will try to both prolong the maturity of the bonds for as long as possible (ideally, beyond a standard five-year term) and reduce the coupon rates.

The market seems to have already priced in some extreme restructuring case for Kyiv city bonds (both bonds trade at about 42% of their par value). The current prices of CITKIE bonds provide a 20% IRR (which we assume to be an acceptable rate of return for Ukrainian paper) in case the bonds’ maturities are prolonged for 7-8 years and their coupon rates are lowered by 3-4pp.