Ukraine Bond Deal at Risk Again as Rebel Investors Demand Change

Maidan Square in Kiev, Ukraine

(Bloomberg – – Natasha Doff, Marton Eder – September 17, 2015)

A group of investors in Ukraine’s shortest-dated bonds stepped up pressure on Franklin Templeton to adjust the terms of an $18 billion restructuring agreement they argue is biased against them, saying they have the power to block the deal.

Holders of the $500 million Eurobond due on Sept. 23 have a so-called blocking stake in the security, Shearman & Sterling LLP, the law firm representing them, said in an e-mailed statement on Thursday. That means they own the 25 percent needed to potentially thwart a vote on the agreement finalized last month with a committee of some of Ukraine’s biggest bondholders.

Holdouts may threaten a ratification process that’s behind schedule due to delayed sign-off on the deal by the eastern European nation’s parliament. The war-ravaged country needs to restructure its external debt to qualify for a $17.5 billion International Monetary Fund loan, which is already at risk because of Russia’s insistence on being repaid in full for a bond due in December.

“The question is how hard they are willing to negotiate, and are they willing to bring the entire deal down for the sake of a fairer deal,” Tim Ash, the head of Europe, Middle East and Africa emerging-markets credit strategy at Nomura Holdings Inc. in London, said Thursday in e-mailed comments. “There is still a lot of work to be undertaken to put this particular deal to bed.”

Holdout Risk

The accord includes a 20 percent writedown to the face value of the bonds, higher average interest payments and warrants tied to economic growth. Ukraine would issue nine new bonds of equal size maturing annually from 2019 to 2027, giving all holders a share of each security. The bond due next week climbed 0.68 cent to 78.23 cents on the dollar on Friday, near the highest level this year.

The dissenting investors argue the distribution isn’t fair to the owners of notes due this month and Oct. 13 since their investments are delayed for more years than everyone else. A spokesman for the main four-member creditor committee, led by Franklin Templeton, declined to comment when contacted by Bloomberg on Thursday.

This latest threat comes after Ukraine’s parliament passed the accord on Thursday, dispelling concern that a revolt by lawmakers would scupper the deal and jeopardize the flow of bailout funds. Russia’s Finance Ministry stepped up pressure on Ukraine shortly after the vote passed, issuing a statement on its website saying it was in Kiev’s interest to settle the $3 billion bond it owes “immediately, since defaulting on these obligations would cost it much more” in legal costs and late-payment penalties.

Finance Minister Natalie Jaresko said Sept. 11 that the group of potential holdouts were in discussions with the main creditor committee. She said she didn’t expect they would “have any influence” on the deal’s implementation.

Changing Allocations

“To the contrary, the Franklin group has not responded to our clients’ request to engage,” Shearman & Sterling said in the statement, without naming the members it’s representing. “Our clients believe that the only thing standing in the way of this sensible resolution is the refusal of the Franklin group to engage with them.”

While the dissenters aren’t opposed to overall terms, they want allocation of the new notes to give them bigger portions of the earlier securities to even out the average maturity extension to approximately four years, Shearman & Sterling said last week.

Ukraine aims to start the voting process on Monday, six days later than targeted. Bondholders must be given at least 21 days notice before a vote can be called, and 75 percent of the investors need to vote in favor at a meeting in which two thirds of the creditors are represented. The Franklin Templeton group also has a blocking stake in the Sept. 23 note, a source with knowledge of the holdings said in July.

The heads of terms agreement, a legal document accompanying the restructuring deal, does specify that Ukraine and the creditor group can adjust allocations to shorter-dated notes in order to push through approvals.

The strategy of the dissenting group is “designed to increase pressure on the ad-hoc committee to come to the table,” Michael Roche, an emerging-market strategist at Seaport Global Holdings LLC in New York, said by phone. “It’s not over yet. There are some deadlines that are coming up that should help get a conclusion: either the acquiescence by the dissenting group to the status quo or a negotiated solution between the two.”

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