Ukraine reaches preliminary deal with bondholder group in effort to avoid default

4 months ago 22

Ukraine said on Monday (22 July) it had reached an agreement in principle with a group of creditors to restructure $20 billion of international bonds, bringing the war-torn country closer to an unprecedented debt rework.

Ukraine’s announcement comes just over a week before a two-year debt suspension agreement struck in 2022 is due to run out and marks the first time a country has embarked on a debt restructuring during a full-scale war.

“After months of engagement and hard work with our private bondholders, the IMF and our bilateral partners, we have reached an agreement in principle with the Ad Hoc Creditor Committee on the comprehensive restructuring of our public external debt,” Finance Minister Serhiy Marchenko said in a statement.

This was an important step to ensure Ukraine maintained the budget stability and cash resources needed to continue financing its defence, he added.

Ukraine’s finances are precarious as its 28-month war with Russia drags on. Russia’s 2022 invasion decimated its economy, leaving it heavily reliant on money – and military aid – from international partners.

The US presidential election in November and the risk of wavering commitment to maintain support for Ukraine under a potential Donald Trump presidency increased pressure for a debt restructuring, sources close to the talks and analysts said.

The proposal would see a 37% nominal haircut on Ukraine’s outstanding international bonds, saving Kyiv $11.4 billion in payments over the next three years – the duration of the country’s programme with the International Monetary Fund set to expire in 2027, according to government statements.

The government said the IMF had confirmed that the deal was compatible with the parameters of its $122 billion support package, and that the country’s official lenders, the Group of Creditors of Ukraine (GCU), had also signed off on it.

A spokesperson for the Paris Club of creditor nations, which usually handles communications for the GCU, confirmed the group was comfortable with the proposal.

The IMF welcomed the agreement and confirmed it is consistent with the current program, adding that it will be “essential to bring Ukraine’s debt burdens to sustainable levels, thereby ensuring room for critical spending and supporting growth.”

Ukrainian Prime Minister Denys Shmyhal said in a message on the Telegram app that the deal would free up resources for urgent needs, including defence, social protection and recovery.

A source at the Germany finance ministry welcomed the draft agreement and said it was a key step to preserve the Ukraine government’s ability to act and plan ahead.

The Ad Hoc Creditor Committee, which holds 22% of the country’s sovereign bonds, called the agreement “swift and constructive”.

“We are pleased to be able to provide significant debt relief to Ukraine, assist its efforts to regain its access to international capital markets, and support the future reconstruction,” it said in a statement.

Racing to the finish

Under the proposal, some of the new bonds issued would start paying a 1.75% coupon from next year, with payments stepping up to as much as 7.75% from 2034 onwards. Bondholders are also in line to receive a consent fee.

Interest payments had been a sticky issue in the talks. Bondholders sought financial inducement to agree to a rework, while Ukraine’s international partners such as Group of Seven nations and the IMF objected to large amounts of money being funnelled to private lenders and away from strained government finances.

Payments to bondholders under the deal would amount to less than $200 million through to end-2025.

While the bonds have a face value of $19.7 billion, Ukraine owes around $23 billion with past due interest.

The international bonds soared more than 5 cents after the announcement, with most maturities trading around the 35 cents mark and at their strongest in about two years.

Ukraine’s $2.6 billion GDP warrants – fixed-income instruments with payouts linked to the strength of economic growth – were not part of the restructuring, though the government said it would “ensure the fair and equitable treatment of holders of the Warrants”.

Bondholders will vote on the proposal in coming weeks. If enough sign off, the government will issue new bonds.

A first payment in the wake of the two year moratorium is due on 1 August, but Ukraine last week passed a law allowing it to miss payments – and enter debt default, even temporarily – while the agreement is finalised.

The debt deal would be Ukraine’s second in a decade triggered by its neighbour: Ukraine restructured in 2015 following Moscow’s annexation of Crimea.

“Once completed, this restructuring will also pave the way for Ukraine’s market re-entry as soon as possible when the security situation stabilises to fund our country’s swift recovery and reconstruction,” Marchenko said in the statement.