29 Mar 2024 16:17

Proposal on Ukrainian Eurobonds restructuring likely to contain provision on partial debt write-off - analysts

MOSCOW. March 29 (Interfax) - The Debt Sustainability Analysis (DSA) for Ukraine, carried out by the International Monetary Fund as part of the third review of its Extended Fund Facility (EFF), assumes a partial debt write-off to achieve such sustainability.

Such a write-off will be one of the points of Ukraine's anticipated proposal to restructure Eurobonds in the near future, analysts polled by Ukrainian media said.

"The IMF sees our public debt as sustainable with a debt/GDP ratio of 82% in 2028. But the IMF forecasts that without restructuring, Ukraine's public debt will grow to 91.2% of GDP in 2028, which means Ukraine has to reduce this debt by 9.2% of GDP, or approximately $21 billion to achieve sustainability," said Alexander Parashchy, head of the Concorde Capital investment company's analytical department.

"It can be deduced from this that the IMF sees the potential to write off about $15 billion of government debt this year. This is a very large amount, considering that it is mostly Eurobonds, totaling $21.2 billion, which should be subject to such a write-off," he said.

ICU group financial analyst Mikhail Demkiv said the memorandum was vaguely worded, that it was impossible to distinctly determine the parameters of the restructuring from it and anyone can interpret it as they like, but the market "except perhaps for the super optimistic" is expecting a debt write-off.

He said the Fund might deliberately be giving the Finance Ministry some sort of leeway in negotiations, so as not to tie its hands too much or put it in a worse position.

"The optimists expect 30-40% [write-offs] and the pessimists 40-50-75%. Personally, I expect that there will be a write-off, something like 40%," the expert said. He said suggestions of a 70%-75% write-off were at odds with what the Finance Ministry's has been saying about returning to the market.

Demkiv said he did not expect the Finance Ministry to make payments on Eurobonds (repayment + interest payments) until 2027, although there are optimists who see room for this in the DSA.

"As for the warrants, I don't know whether they will be included in the scope of the restructuring. There have been reports that regarding guaranteed debt (Ukrenergo), investors want to block the restructuring so that these securities are not included," he said.

Concorde Capital's Parashchy said it was quite right that the IMF had, in order to analyze Ukraine's debt sustainability, excluded debts to Russia in the amount of about $3.6 billion (principal debt), because it is obvious to everyone that Ukraine will not repay or service them.

"Where I find fault with the IMF's calculation (the 82% in 2028) is the actual calculation of the public debt in 2028. If we count all of Ukraine's debt receipts, which the IMF itself projects, and also take into account all exchange rate differences, then it turns out that Ukraine's state and guaranteed debt in 2028 will be approximately 87.3% of GDP," he said.

He said that in such calculations, in order to achieve the 82% debt to GDP ratio in 2028, Ukraine would need to reduce its debt not by $21 billion, but by less than $9 billion (or approximately $6.4 billion this year).

"That is, the difference/margin of error in the forecast turns out to be quite noticeable for the amount of potential write-off - more than double. How the IMF explains this difference is not entirely clear, except that it planned some kind of contingent liabilities and 'misc' to the equivalent 4.3% of GDP," Parashchy said.

Demkiv said the positive reaction by holders of Ukrainian Eurobonds to the publication of an updated memorandum with the IMF, with prices rising 10% on average to 30-38 cents per dollar, is associated with the IMF's improved assessment of Ukraine's debt at the end of last year from 87.1% to 82.9% of GDP.

"If the debt level improves, then less needs to be written off. And another point that some have noted is that the debt/GDP wording has become a little softer: from 'must' to 'recommended'" the ICU analyst said, adding that such a positive reaction could also be influenced by the release of EU funds and improved prospects for receiving funds from the U.S. in April.

"Sufficiently deep debt treatments would be needed to decisively restore debt sustainability and support adequate levels of international reserves," the IMF said following the third EFF review.

Ukraine's public debt needs "deep treatments" but even if successful, restoring debt sustainability will still require significant fiscal adjustment and financing exclusively by donors, it said.

Documents do not directly mention the desirability of partial debt write-off, while the IMF says Ukraine needs to reduce public debt to 82% of GDP by 2028 and to 65% of GDP in 2033, whereas in the baseline scenario, it will be higher in these years by almost 9 pp and almost 6 pp, respectively.

Among the restructuring targets, it is also stated that gross financing needs should average 8% of GDP in the post-program period (2028-2033).

Additional restructuring targets, besides reducing debt to 82% of GDP by 2028, include lowering the cost of servicing debt on external obligations to 1-1.8% of GDP (from $1.9 billion in 2024 to $3.5 billion in 2027).

According to the third review materials, Ukraine's authorities and their debt advisors are finalizing technical work with a view toward designing a debt operation aligned with the program's debt sustainability targets. They plan to present initial proposals to creditors shortly, in line with their intention to conclude the restructuring by mid-year and ahead of the expiry of the debt standstill in August 2024.

"As part of the external commercial debt treatment, which we plan to complete by mid-2024, we will seek to obtain adequate relief from debt flows, including from external commercial debt restructuring, in 2024 and beyond in accordance with the program's parameters," the Ukrainian authorities said in an updated financial and economic policy memorandum.

As reported, ahead of the International Monetary Fund's approval of a new four-year EFF worth $15.6 billion at the end of March 2023, the group of Ukraine's formal creditors (the Paris Club) following a meeting with IMF and World Bank representatives provided financial guarantees for the program. This includes further standstill in Ukraine's payment of debts to the group members throughout the EFF period (2023-2027). The standstill is conditioned on similar actions of Ukraine's private foreign creditors, mostly Eurobond holders.