Ukrainian finance minister: GDP warrants created for economic reality that is no longer there
MOSCOW. April 25 (Interfax) - Due to the enormous damage caused by the crisis, Ukraine needs to restructure its GDP warrants issued in 2015, payments on which due up to 2041 are dependent on the dynamics of the Ukrainian economy, local media cited Finance Minister Sergei Marchenko as saying in a commentary after Kiev failed to reach a restructuring deal with GDP-linked debt holders.
"The GDP warrants were designed for an economic reality that no longer exists. Ukraine's moderate GDP growth in 2023 is not a sign of economic prosperity but a fragile rebound from a nearly 30% downturn" caused by the crisis, Marchenko said.
These instruments should not impede Ukraine's recovery, he said.
"Our objective is to reach a fair and comprehensive solution to this issue," Marchenko said.
World Bank estimates tentatively put reconstruction costs at over 500 billion euros over the next decade. Therefore, financial stability and sustainable public debt are essential to Ukraine's all-round recovery and development, he said.
"We remain committed to constructive engagement with investors - just as we demonstrated it during last summer's successful Eurobond negotiations - to secure a mutually beneficial outcome that supports Ukraine's sustainable financial future and preserves investor confidence," Marchenko said.
The Finance Ministry said in a stock exchange filing on Thursday that the Ukrainian government held a meeting from April 15-23 with certain members of a committee of institutional investors holding around 30% of Ukraine's GDP warrants and submitted its proposals for restructuring the related obligations. The proposals are based on the parameters of the International Monetary Fund's program for restoring debt sustainability and are consistent with the Comparability of Treatment principle of the Group of Creditors of Ukraine.
Ukraine's proposal for GDP warrant holders contained two options. The first provided for the exchange of GDP warrants for Eurobonds issued in the framework of their restructuring in 2024. Under this option, investors will receive the same set of A bonds and B bonds as last year's Eurobond holders with an exchange ratio of 1.35x.
The second option was to waive payments on GDP warrants in 2025-2028 if economic growth exceeds 3% in 2023-2026, and an amendment to the call option. The latter provided for deferring it until May 31, 2029 and modifying the redemption price with a gradual increment to 85% of the notional amount until May 31, 2027, 90% until May 31, 2028, and 100% until May 31, 2029. The restructured warrants (with payments due in 2029-2041) will have the same properties as the current warrants, except for the buyback option. Also, the warrant holder would receive Ukrainian Eurobonds issued under their 2024 restructuring at an exchange ratio of 0.366x.
According to the ministry, both options are part of one exchange transaction (Exchange Offer) and a request to change the terms of circulation (Consent Solicitation). Therefore, investors can choose any of the proposed options, and participation in one of them will be considered as support for the restructuring of the warrant issue terms. This approach is important given that various GDP warrant holders may have different priorities, whereas it is necessary to receive consent from 75% of the holders by the aggregate nominal value of GDP warrants from the warrant holders present at the quorum meeting.
However, the GDP warrant holders' committee rejected this offer and invited Ukraine to provide 75%, or $406 million, of the payment due in May 2025 to warrant holders for GDP growth in 2023 and issue new C bonds with a rate of 7.75% for an amount of $209 million maturing in February 2029. Ukraine rejected this offer.
"Ukraine intends to continue constructive negotiations with all GDP warrant holders with the aim of securing a solution that will help ensure long-term debt sustainability without jeopardizing the recovery and reconstruction of the country," the ministry said.
Following the ministry's stock exchange filing confirming the absence of a restructuring deal between Ukraine and GDP warrant holders, Ukraine's GDP warrants on the Frankfurt Exchange dropped 2.22% to 70.05% of their face value. A week earlier, these instruments rose to 68.55% to 72.4% on the back of news that Ukraine and the U.S. could sign an investment agreement and that a ceasefire agreement could be reached between Ukraine and Russia.
As previously reported, Ukraine reached an agreement with holders of its GDP warrants in August 2022 to revise the conditions on them, specifically, to defer payments due in 2023 by 14 months, limit the possible amount of payments in 2025 for 2023 at 0.5% of GDP, extend the duration of these instruments by a year, until 2039, and also give Ukraine the right to completely or partially repurchase them in 2024-2027. It was agreed that the payment due on May 31, 2023 for strong economic growth in 2021 would be deferred until August 1, 2024, and it would accrue 7.75% interest per annum.
Under the initial terms of the GDP warrants, which were issued as part of restructuring Ukraine's government debt in 2015 in exchange for Eurobond for a conditional amount of around $3.239 billion, if GDP growth is lower than 3% for the year, no payments are made on the warrants. If real GDP grows by 3% to 4%, the payment on the warrants is 15% of the amount by which GDP exceeds 3%, and if growth is higher than 4%, another 40% of the amount by which GDP exceeds 4% is paid. However, payments were initially restricted to 1% of GDP from 2021 through 2025. The absence of such restrictions on payments after 2025 in the event of strong GDP growth was criticized by some politicians and experts in the country.
Ukraine's GDP grew 5.3% in 2023, which means the country needs to pay $520 million on the GDP warrants in 2025. These calculations are based on the fact that GDP warrants with a tentative nominal value of $2.635 billion are in circulation outside Ukraine, while the others were earlier bought back by the Finance Ministry. While restructuring the Eurobonds in 2024, the Ukrainian government imposed a moratorium on payments on GDP warrants until they are restructured.
Prices for the GDP warrants since they were issued have gone as high as 110% of the nominal amount and even higher, but they are now quoted at about 58%, their highest since February 2022, since when they have fallen below 20%. Following Donald Trump's victory in the U.S. presidential election and expectations that the crisis could end soon, GDP warrants traded as high as 86.35% of their face value in early February 2025, but again dropped to 60% in mid-February as frustration grew.