Ukraine and creditors have not reached agreement on terms of Eurobond restructuring, discussions to continue

MOSCOW. June 17 (Interfax) - Ukraine and a special committee of creditors, representing holders of about 20% of the country's Eurobonds, held negotiations and exchanged proposals for restructuring from June 3-14, but were unable to reach an agreement, in part because the terms proposed by commercial creditors for the IMF and the Group of official creditors of Ukraine were deemed unacceptable.

"The proposal (...) was brought to the attention of the IMF, who previously assessed it as not meeting the IMF's DSA (Debt Sustainability Analysis) targets. This was also reported by the secretariat of the Ukraine Creditors' Group, which confirmed that any cash flows within the duration of the IMF program should remain symbolic," Ukrainian media reported, citing Ukraine's Ministry of Finance.

"Although Ukraine and the special creditors' committee did not agree on restructuring terms during the consultation period, Ukraine and the special committee will continue to interact and constructively discuss them via their respective advisers, and Ukraine will continue bilateral negotiations with other investors with a view to achieving further progress and achieving fundamental agreement at the earliest possible opportunity," the press release said.

Ukraine's initial proposal included two restructuring options with a nominal discount of 25% to 60% depending on the country's recovery during the IMF program period, while creditors initially offered 20% and then agreed to 22.5%.

The initially proposed first option involved receiving 100% of the face value of existing vanilla bonds in return for 40% of their amount and Ukrainian recovery instruments (SCDI) for 35% of their amount, the Finance Ministry said. Vanilla bonds would be issued in five series with maturity in 2034-2040 and fixed income with gradually increasing coupons (1% per annum in 2024-2025, 3% in 2026-2027 and 6% from 2028). Whereas SCDI could be converted into vanilla bonds with a coefficient that would depend on Ukraine's tax revenues, subject to conditions relative to the levels of real GDP projected in the IMF's baseline scenario.

Ukraine's second initial version assumed that commercial creditors would just receive vanilla bonds worth 47.5% of the face value of existing Eurobonds.

The Finance Ministry said that, in the first case, the flow of coupon payments would total about $680 million in 2024-2027, while in the second, it would total approximately $725 million.

The report says that these proposals were agreed with the IMF and the Group of Official Creditors and were consistent with the main goals of the DSA under the IMF program: a debt-to-GDP ratio of 82% of GDP by 2028 and 65% by the end of 2033, an average GFN (debt service) to GDP ratio of 8% in 2028-2033, as well as payment on external debt of 1-1.8% of GDP through 2028.

Ukraine warned the special committee of creditors and investors about the deterioration of the macro forecast in the fourth review of the program with the IMF, which is now ending, the report says.

In addition, the Finance Ministry said that cash flows on GDP warrants are also included in the IMF DSA and, therefore, will need to be taken into account when developing any decision on the restructuring of the Eurobonds; in this regard, Ukraine proposed to exclude cases of default associated with warrants or references to them, for new instruments.

In turn, the special committee of creditors agreed with the possibility of exchanging existing Eurobonds for two types of bonds, but proposed a lower level of write-off - 20%, which provides for the receipt of 40% of the debt from market bonds maturing in 2030-2036 and another 40% - recovery bonds with maturity in 2032-2038.

In addition, creditors asked to maintain the existing coupon on market bonds of 7.75%, and pay a coupon on recovery bonds from 0.5% in 2024-2027, 2.5% in 2028-2033 and 7.75% from 2034. The conditions they proposed for exchanging recovery bonds for market bonds based on the results of the macro test were more favorable for them than those in the Ukrainian proposal.

Ukraine informed the ad hoc committee following feedback from the IMF and the Official Creditors' Group that its proposal would not meet the objectives of the debt transaction, and submitted a modified base case and two "illustrative" alternatives for further development, albeit not yet agreed upon by the IMF and the Creditors' Group, to demonstrate its readiness to reach a deal.

These alternatives included zero-coupon bonds, macro-linked bonds with varying haircut compositions ranging from 40% to 60% and coupon levels.

In the modified base case, which does not consider the worsening macro outlook, "market bonds" are issued at 30% of the principal amount of Eurobonds with a coupon of 4% in 2024-2027 and 6% from 2028; and recovery bonds at another 30% with a zero coupon in 2024-2027, 3% in 2028-2033 and 6% from 2034.

In the first alternative, vanilla bonds would be issued at 40% of the principal amount of Eurobonds with a coupon of 1% in 2024-2025, 3% in 2026-2027 and 6% from 2028, and SCDI with a possible restoration to 35% of the principal amount of Eurobonds with a 6% coupon from 2028, subject to passing the macro test in 2028.

The second alternative would see Eurobond holders receiving recovery bonds for 10% of the principal amount of Eurobonds with a maximum potential recovery of up to 45% of the principal amount of Eurobonds, but this would depend on a macro test in 2027, including the possibility of completely zeroing out this part of the debt.

Finally, the special committee of creditors responded to this clarified proposal from Ukraine with its own adjusted proposal, which increased the write-off amount to 22.5% by reducing the issue of recovery bonds from 40% to 37.5% of the total amount, and also allowed for the 0.5% capitalization of of the coupon on market bonds during the IMF program period, while maintaining the 7.25% per annum cash payment. The adjusted proposal from the special committee still allows for the potential full compensation of concessions, the Finance Ministry said.

Ukraine was joined in the negotiations by legal and financial consultants White & Case LLP and Rothschild & Co, while the special committee of creditors was joined by Weil, Gotshal and Manges (London) LLP and PJT Partners (UK).

The Ministry of Finance said that, as part of the ongoing restructuring process, the consultation period was intended to allow Ukraine to present a restructuring proposal to the special committee of creditors and investors, as well as to provide an opportunity to directly interact and exchange ideas with IMF staff and the secretariat of the Ukraine Creditors' Group.

As reported, on August 10, 2022, Ukraine received the consent of the holders of 13 issues of its Eurobonds for a total amount equivalent to $22.6 billion, as well as two issues of Eurobonds under government guarantees for approximately $1.5 billion, to defer interest and principal payments on them for 24 months. At that time, the restructuring did not involve a debt write-off.

The market has been expecting a proposal from the Finance Ministry since mid-spring 2024 on a new restructuring of commercial debt on the Eurobonds. Their holders formed a special committee ahead of the negotiations. The Wall Street Journal reported in early May that a group of bondholders, including BlackRock BLK and Pimco, planned to pressure Ukraine to resume interest payments on its debt as early as next year in exchange for writing off a significant portion of the country's outstanding debt.

On the eve of the IMF's approval in March 2023 of a new four-year Extended Financing Facility (EFF) for Ukraine worth $15.6 billion, a group of official creditors of Ukraine (the Paris Club), following a meeting with representatives of the IMF and the World Bank, provided financial guarantees for this program. They assume the extension of the pause (standstill) on Ukraine's debt payments to the group countries for the period of its validity (2023-2027). The condition this deferment is similar actions on the part of Ukraine's private external creditors, mainly Eurobond holders.

In turn, Ukraine's Finance Ministry stated on March 24, 2023 that the government of the country would take several measures during the program to manage public external debt in order to achieve a number of goals: to restore debt sustainability, maintain liquidity, reduce the financing gap and create the necessary conditions for the participation of the commercial sector in economic recovery.

"The Ukrainian authorities will consider several alternative scenarios for implementing the required debt repayment regime in order to maximize the efficiency and success of the process, while keeping in mind the goal of restoring Ukraine's market access as soon as possible. The Ukrainian government has hired financial and legal consultants to support this process," the Ministry of Finance said at the time.

The ministry is expected to begin negotiations with holders of Eurobonds worth $20 billion on a new restructuring in early 2024, with a view to completing them no later than mid-2024, it said.

The IMF recently said Ukraine's public debt needs "deep resolution." The IMF materials do not directly mention the desirability of a partial debt write-off, while at the same time the IMF states that Ukraine must reduce its public debt to 82% of GDP by 2028 and to 65% of GDP in 2033. Additional goals for restructuring, in addition to reducing debt to 82% of GDP, also include reducing the cost of servicing debt on external obligations to 1-1.8% of GDP.

Ukraine's consultations with Eurobond holders on debt restructuring will soon take place outside the special committee of creditors, which represents holders of about 20% of its Eurobonds, the Finance Ministry website says.

"Over the coming weeks, the Ukrainian government will consult with Eurobond holders outside the Eurobond Owners Committee and collect feedback from the wider investor community regarding the structure of the deal and instruments. An agreement with investors on the terms of the restructuring is expected before August 1 of this year," the statement said.