Ukraine Creditors Said to Offer Coupon Cuts, Debt Extensions

(Bloomberg – bloomberg.com – Natasha Doff – May 28, 2015)

Ukraine’s creditors including Franklin Templeton put forward a restructuring proposal that includes maturity extensions of up to 10 years and reductions in interest payments of about $500 million.

The offer, submitted on May 9 by a group owning about $8.9 billion of Ukraine’s debt, involves amortizing the bonds over a seven-year period starting in 2019, according to a person with knowledge of the thinking of the committee. The group argues that the plan meets all three targets in the International Monetary Fund’s $17.5 billion rescue package, the person said, asking not to be identified because the talks are private.

While Finance Minister Natalie Jaresko said May 21 it was a “necessity” for creditors to accept losses on about $20 billion of debt, the bondholder group regards the push for a so-called haircut as arbitrary and politically motivated, the person said. The rift underscores the challenge facing Ukraine in showing the IMF it’s made enough progress in the debt talks by mid-June to qualify for its next aid tranche.

It also increased the risk that the two sides may struggle to reach a compromise before the eastern European nation’s first note — a 6.875 percent $500 million security — comes due on Sept. 23. Other bonds being reprofiled include $2.6 billion of debt maturing in July 2017, which is trading at 46.66 cents on the dollar, up 0.4 cent to the highest in more than two weeks by 12:15 p.m. in Kiev.

‘Concrete Proposal’

“It is a concrete proposal that will help Ukraine get through the coming years without the need for a de-facto default,” Simon Quijano-Evans, the head of emerging-market research at Commerzbank AG in London, said by e-mail. “A no-haircut scenario would enable Ukraine to access bond markets again this year.”

A key hurdle to a deal is Ukraine’s insistence the creditors’ proposal doesn’t go far enough in meeting all three targets required by the IMF to improve debt sustainability over 10 years. The nation’s economic situation has unraveled since Russia annexed Crimea in March 2014, sparking a separatist conflict in the easternmost regions. The economy shrank almost 18 percent in the first quarter.

The first IMF goal is to save $15 billion in the next four years. The second calls for reducing the ratio of debt to less than 71 percent of gross domestic product by 2020, while the last involves bringing the budget’s gross financing needs to an average of 10 percent of GDP from 2019 to 2025.

Coupon Cuts

The creditor proposal achieves these objectives by lowering the interest and principal burden in the beginning, the person said. The maturity extensions differ from bond to bond and the plan will yield savings for Ukraine of $15.8 billion in the first four years, exceeding the IMF target, according to the person. In the latter years, Ukraine would need to pay higher coupons and gradually repay principal.

The creditor group declined to confirm details of the proposal.

“The committee has its best foot forward and crafted something that either meets the sovereign’s requirements or exceeds them,” Blackstone Group International Partners LLP said on behalf of the creditor committee in an e-mailed response to questions. “The bondholders in the committee are not opportunistic funds trying to block a deal with a minority stake or make short-term gains.”

Writedown Needed

Ukraine, which is being advised by Lazard Ltd., has argued it won’t be able to meet the objectives without a principal reduction, a position that is supported by analysts at banks including Citigroup Inc. and Bank of America Merrill Lynch.

“A reduction in coupon and nominal is necessary in achieving the IMF’s three targets for Ukraine’s medium-term debt sustainability,” Ukraine’s Finance Ministry said in an e-mailed response to questions, reiterating the government’s stance.

Franklin Templeton is Ukraine’s single biggest creditor, followed by Russia, which has said it won’t negotiate terms on the $3 billion Eurobond due in December, purchased from the regime of former President Viktor Yanukovych before he was overthrown in February 2014.

The other committee members are BTG Pactual Europe LLP, TCW Investment Management Co. and T. Rowe Price Associates Inc. The group is in close contact with holders of at least another $1.1 billion of debt, it said in a May 18 statement.

Fair Value

The creditor group sees no fundamental economic rationale for why a haircut is the right approach, and Ukraine hasn’t offered an explanation, the person said. A wider $40 billion bailout package for the country envisions Western governments extending about $7.2 billion in bilateral loans or guarantees.

“Ultimately we will have a friendly restructuring and it will involve a relatively small haircut of about 20 percent,” Ivan Tchakarov, a Moscow-based economist at Citigroup, said by e-mail. “The fair value of bonds is around 50ish or so. The price moves we are seeing, in my view, now reflect such a scenario.”

Tensions flared earlier in May as creditors and Ukraine blamed each other for stalling, signaling they were communicating through the media rather than in private meetings. Ukraine got parliamentary approval on May 19 to impose a moratorium on coupon payments if needed.

The person said the committee has received no substantive response from Ukraine to its proposal nor have there been regular meetings between advisers. Jaresko suggested in an interview last week that creditors were behind much of the delay.

The committee met with Lazard last week and Jaresko has asked for a call with the group, and they will have a call, according to the person.

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