Ukraine asks GDP warrant holders to delay 2023 payments, halve ceiling for 2025 payments - document
MOSCOW. July 20 (Interfax) - The Ukrainian government has unveiled a number of proposals to holders of Ukrainian GDP-linked warrants, which include voluntarily postponing payments on GDP warrants due in 2023 for 14 months, limiting the possible amount of payments in 2025 to 0.5% of 2023 GDP, extending these instruments' circulation period by a year, and simultaneously allowing their full or partial buyback in 2024-2027.
"If the holders of these state derivatives disagree to these changes contained in these terms, further payments on state derivatives shall proceed in accordance with the terms of the issue and placement of the state derivatives," the Ukrainian media said, citing the Ukrainian government's July 19 Executive Order No. 806, published on the governmental website on Wednesday.
According to the order, agreement on such conditions should be reached by August 15.
With regard to Ukraine's right to redemption, it is stated that if during the specified period any payments should be made on GDP-linked warrants according to the terms of their issue, the redemption amount is increased by the amount of these payments.
The document specifies that with the extension of the circulation period of GDP-linked warrants by a year, the last reporting year is 2039, and the final date is the date of payment in 2041.
The government is proposing that payments on GDP-linked warrants coming due May 31, 2023, be deferred until August 1, 2024, and that they be subject to interest at 7.75% per annum.
In contrast to the proposal to defer payments on Eurobonds by two years, where there is no consent fee, in the case of GDP-linked warrants, one is envisaged.
"The amount of the consent fee is calculated by the Finance Ministry given, in particular, information provided by business entities engaged by the Ministry of Finance to provide agency, consulting or other services for with the transaction, and may not exceed $215 million," the document reads.
The consent fee is to be due August 1, 2024, and accrues interest at 7.75% per annum from the date of the transaction.
"In case of non-payment of the consent fee to holders of state derivatives the holders have the right to demand that the issuer redeem state derivatives belonging to them at a price equal to the aggregate notional amount of state derivatives to be redeemed," the document also reads.
According to the terms of the GDP-linked warrants, which were issued as part of the restructuring of Ukraine's state debt in 2015 to replace Eurobonds worth about $3.239.32 billion, if GDP growth for the year is below 3% or real GDP is less than $125.4bn, there will be no payments on the securities. If real GDP growth is 3% to 4%, the repayment of the bonds will be 15% of the excess of GDP over 3%, and if it is more than 4%, then another 40% of the excess of GDP over 4%.
As such, in 2023, Ukraine will have to pay 0.06% of GDP, or about $120 million, and if the Finance Ministry acquires 20% of GDP-linked warrants on the market - about $96 million.
Furthermore, payments are limited to 1% of GDP from 2021 to 2025. The lack of any limits on payments after 2025 in case of rapid GDP growth was criticized by some politicians and experts within the country.
Over the circulation period, the value of the GDP-linked warrants reached 110% of the notional amount and even more. In early February, it was about 60%, then fell below 20%, before recovering to 38.8% by early June, and now down again to 23%.
Sovereign Eurobonds
According to resolution No. 805 dated July 19, 2022, on amending the terms and conditions for issuing sovereign Eurobonds, and posted on the government's website, Ukraine will appeal to the holders of its Eurobonds with a proposal to extend the term of their circulation and to defer yield payments on securities for two years.
The resolution on amending the terms and conditions is planned for agreement with the bond and securities holders before August 15. Meantime, the document stipulates that if Eurobond holders refuse the offer, then the government will service and repay the obligations in accordance with the terms and conditions of the securities issue.
Consequently, yield payments on the first series 2018 bonds, payable on August 1, 2022, will be rendered no earlier than the date of the holders' voting on the proposed amendments, though no later than the expiration of the deferral period for the payments.
If the Eurobond holders approve the amendments, then yield payments on the securities will continue to accrue at the current rates for two years, and additional yield payments will accrue on the amount of the main yield payments at the same rates. "At any time during the specified deferral, the total amount of accrued main and additional yield payments could be paid to the bondholders in part or in full based on a separate decision of the Cabinet of Ministers of Ukraine," according to the document.
The yield amount on Eurobonds not remitted once the deferral period has expired could be paid to the bondholders in full or via an additional issuance of the relevant bonds.
"The Finance Ministry calculates the bondholders' yield amount that cannot exceed $3 billion for all U.S. dollar-denominated bonds and 300 million euros for all euro-denominated bonds," according to the resolution.
The Finance Ministry has been instructed to coordinate the amendments with the Eurobond holders and the budget committee of the Verkhovna Rada.
Ukrainian media the previous day reported that the Cabinet of Ministers of Ukraine had decided to defer payments on Eurobonds until July 2024.
Furthermore, the government decided to postpone payments on GDP-linked warrants for the same period, and also proposed to extend the limitation on maximum payments on them from 2025 to the end of 2027 and to lower the payment ceiling from 1% of GDP to 0.5% of GDP.
Once the information was reported, sovereign Eurobonds maturing in 2024-2033 fell by 17.7%-19.2% of par value; sovereign Eurobonds maturing in 2023 dropped up to 23.5% of par value; and sovereign Eurobonds maturing in 2022 plummeted up to 34.4% of par value.
According to materials on the Finance Ministry's website, there are currently 13 issues of Ukrainian Eurobonds in circulation, including two in euros, and the rest in dollars.
Three issues of Ukrainian Eurobonds totaling $3.17 billion are maturing by July 2024 at $912.35 million on September 1, 2022; $1.355 billion on September 1, 2023; and $750 million on February 1, 2024.
As previously reported, Ukraine's Naftogaz at the beginning of last week appealed, via the issuer of its Eurobonds, Kondor Finance plc, to the holders of the securities totaling nearly $1.5 billion with a proposal to defer the coupon payments for two years, including a delay for the same period of repayment of 2022 Eurobonds totaling $335 million. This drove sovereign Eurobond price to a historic low.
Consequently, bonds maturing in 2024-2033 were quoted at 16.5% to 18.2% of par value. The shortest bonds maturing in early September 2022 fell the most, by 10.5 percentage points, to 37.3% of par value, while those maturing in September 2023 fell to 25.1% of par value.
However, Ukraine's Eurobonds rebounded late last week on the IMF's statements about Ukraine's intentions to continue carefully servicing its debt.
In particular, 2022 Eurobonds gained the most, almost completely recouping declines - up to 47% of pat value. At the end of the week, bonds maturing in 2024-2033 were in the range of 19%-20.2% of par value, compared with 20.9%-22.5% a week earlier.
GDP-linked warrants also partially recouped losses on Thursday-Friday, to 23.5% of par from 21.9% on Wednesday, but still below the previous week's 25.6% and well below the 38.8% they stood at in early June.