Kyiv city publishes bond restructuring offer, insists on a 25% haircut

The City of Kyiv (CITKIE) has offered the holders of its USD 300 mln notes, maturing in July 2016, to convene a Dec. 8 meeting to vote for their exchange into a set of sovereign notes (UNRAIN) and GDP warrants in the proportion of 75/25, according to the city’s exchange notice. In particular, each USD 1,000 in city notes will be exchanged into USD 375 in sovereign Eurobonds maturing in 2019; USD 375 in sovereign Eurobonds maturing in 2020; and USD 220 in Ukraine’s GDP warrants (plus USD 30 in these warrants to those that vote in favor of the deal). The holders will also receive the 2019 and 2020 bonds, in equal proportion, to compensate for the accrued interest of CITKIE bonds as of Nov. 2. The new government notes will have a coupon rates of 7.75%.

The quorum at the scheduled meeting will be 2/3 of bond outstanding, and the approval rate at the meeting will be 3/4 of votes. If the quorum is absent on Dec. 8, an adjourned meeting may be scheduled in 14-42 days, with a quorum of 1/3 and approval rate of 3/4.

Alexander Paraschiy: As we expected, the city and its advisors decided to insist on a higher haircut to the municipal debt (25%) as compared to what the holders of sovereign bonds received (20%).

Most likely, the new government bonds, to be issued in exchange for the old CITKIE bonds, will be the same series of Eurobonds that were earlier issued in exchange for the government’s old Eurobonds (i.e. their maturity dates will be Sept. 1). That means, the holders of USD 1,000 in CITKIE 2016 notes who will support the deal will receive about USD 390 in UKRAIN’19 notes, USD 390 in UKRAIN’20 notes and USD 250 in Ukraine GDP warrants. The current market price of the securities that CITKIE’16 holders may receive in exchange for their bonds, as of today, is USD 86.91, which is more than the bond’s market price, as shown by Bloomberg: USD 78.09.

As of this moment, we have no information on the exact restructuring details of Kyiv city’s USD 250 mln notes due on Nov. 6, 2015. Providing the exchange conditions are the same for both CITKIE bond issues, the market prices of new securities that the holders of CITKIE’15 may receive is equal today to USD 87.93, compared to the current market price of CITKIE’15 bonds of USD 78.52.   

The existing arbitrage makes the deal potentially beneficial for CITKIE holders, though that does not mean they will approve the deal. Recall, the ad hoc committee of bondholders earlier called the exchange offer unfair. Nevertheless, as a base-case scenario, we assume that the deal will be supported by the bondholders.