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Categorized | Capital Markets, Currencies

Ukraine secures debt restructuring deal

Posted on August 27, 2015

Ukrainian President Petro Porochenko (L) and Belgian Prime Minister Charles Michel shake hands as they arrive for a bilateral meeting, on August 27, 2015, in Brussels. AFP PHOTO / BELGA / JASPER JACOBS **Belgium Out**JASPER JACOBS/AFP/Getty Images©AFP

President Petro Poroshenko of Ukraine (left) and Charles Michel, Belgian premier, arrive for talks in Brussels on Thursday

Ukraine has secured an agreement to avert default and restructure billions of dollars of government debt as the country seeks to repair the damage caused by the loss of Crimea and the continuing war with Russian-backed separatists.

A group of the country’s largest creditors, including the US asset manager Franklin Templeton, has accepted an immediate 20 per cent write-off on $18bn of the embattled country’s bonds, at a time when market turmoil triggered by fears for China’s economy has already wiped billions of dollars from emerging markets funds.

    The deal, hammered out after five months of intense negotiations, includes a freeze on debt repayments for four years.

    Natalie Jaresko, Ukraine’s finance minister, said she was delighted with the terms, adding that the country had endured a “long and difficult road” to reach the accord with creditors.

    For Kiev, restructuring private creditor debt is a vital condition for the International Monetary Fund to press ahead with a four-year financial support programme, totalling about $40bn.

    The agreement comes at a crucial time, with tentative signs that the economy could be starting to stabilise.

    Although output is still falling, the national currency, the hryvnia, has stopped its steep decline, while inflation — which spiralled above 60 per cent earlier this year due largely to utility price rises demanded by the IMF — is moderating.

    The deal may also help to shore up waning support for the government in advance of regional elections in October.

    “The resolution of Ukraine’s debt saga looks like a great success for all parties involved,” said Anders Aslund, an expert on Ukraine’s economy at the Atlantic Council think-tank in Washington. “The IMF has changed the rules of the game as it desired. The bondholders will still do well. Ukraine got the necessary debt relief.”

    Creditors BTG Pactual, Franklin Advisers, TCW and T Rowe Price, said the restructuring would “allow Ukraine to maintain its access to capital markets and provide the stable economic platform that will help the country to restore growth”, and urged the country’s other bondholders to support it.

    However, Russia, which owns a $3bn bond due to mature in December, signalled it would not participate in the restructuring deal, creating potential problems later this year.

    Credit analysts also questioned whether the hard-won proposal would result in solvency.

    Prices for Ukraine’s bonds jumped in the wake of the announcement, with the price of a $2.6bn bond due in July 2017 rising from 57 cents in the euro to 66 cents. The restructuring provided some relief to Franklin Templeton’s Michael Hasenstab, Ukraine’s biggest private sector creditor.

    His Templeton Global Bond Fund is down 6 per cent this month, but the value of his biggest Ukrainian holdings surged by 25 per cent because the restructuring was less severe than expected.

    “This deal is favourable to bondholders,” said Timothy Ash at Nomura.

    Kiev had originally sought a 40 per cent haircut on creditors’ holdings and the 20 per cent haircut agreed puts it at the lower end of recent sovereign debt restructuring deals, according to academics Christoph Trebesch and Juan Cruces. They calculate that the average sovereign haircut in debt restructuring deals since 1970 has been 37 per cent.

    The inclusion of a gross domestic product-linked instrument in the deal could also mean creditors gain in the long term despite the immediate write-off.

    Between 2021 and 2040 investors will receive up to 40 per cent of the value of Ukraine’s annual economic growth above 4 per cent, although total payments will be capped at 1 per cent for the first four years.

    Christine Lagarde, the IMF’s managing director, welcomed the deal, saying it would restore Ukraine’s debt sustainability, and “substantively” meet the objectives under the IMF-supported aid programme.

    Donald Tusk, president of the European Council, also backed the deal after a meeting in Brussels with Petro Poroshenko, Ukraine’s president. Mr Tusk added that negotiators had agreed on a new ceasefire in the east — where fighting has escalated recently — to begin next Tuesday.

    Once plans are submitted to Ukraine’s parliament, a prospectus will be published in mid-September, and bondholders will vote on the restructuring proposal. The timing means that repayment of a $500m bond due on September 23 will be suspended.

    Additional reporting by Stephen Foley