At the end of August, the two-year moratorium on payments granted to holders of Ukraine’s $20 billion international bonds expired.
Since the Russian invasion in February 2022 devastated the country’s economy, Ukraine was forced to freeze debt payments to avoid sovereign default.
Now, Kyiv is working diligently to ensure debt restructuring before the payment moratorium ends, facing unprecedented challenges amid the ongoing war and uncertain economic outlook.
The program with the International Monetary Fund (IMF) necessitates Ukraine to restructure its commercial debt, even though the IMF does not impose a specific timeline.
Nevertheless, Kyiv aims to retain access to international capital markets.
A potential sovereign default could dramatically impede Ukraine’s ability to secure loans from multilateral institutions.
Maintaining the confidence of international creditors is essential to avoid losing further access to vital funding sources.
Ukraine holds international bonds with a nominal value of $19.7 billion, spread across eleven dollar-denominated securities and two euro-denominated ones, maturing between 2024 and 2035.
Including overdue interest, the total debt is estimated at around $23.6 billion according to JPMorgan.
Additionally, there is another $2.6 billion debt tied to a mechanism established during the 2015 debt restructuring following Russia’s annexation of Crimea, aimed at incentivizing creditors based on GDP growth.
Furthermore, there are bonds issued by state-owned enterprises, such as Ukravtodor, responsible for road construction and maintenance, which has a debt of $700 million, along with the electric grid management company Ukrenergo, which owes $830 million by the end of March 2024.
A formal debt restructuring would likely involve replacing current bonds with new ones under different terms negotiated with bondholders.
However, restructuring can take months or even years, especially under the strain of ongoing conflict, complicating an already complex situation.
Alternatively, Ukraine could seek an extension of the payment moratorium for another year or more, providing time to negotiate with creditors.
A group of official creditors, including Canada, France, Germany, Japan, the UK, and the US, has already agreed to suspend payments until March 2027.
Without either extending the moratorium or restructuring the debt, the risk of default increases, further complicating access to new financing.
Currently, Ukraine’s dollar bonds are trading below 30 cents on the dollar, a troubling level.
A potential restructuring deal might involve extending maturities, reducing capital amounts (known as haircuts), or temporarily cutting or suspending interest payments.
JPMorgan has proposed an arrangement whereby existing bonds could be exchanged for four new ones with maturities ranging from 2028 to 2039 and staggered interest payments.
According to JPMorgan analysts, a 30% haircut on the total debt, including deferred interest, combined with reduced interest rates, could align Ukraine with the debt sustainability targets set by the IMF.
Additionally, GDP-linked warrants may be integrated into a new bond with a 2041 maturity.
Ukraine and its creditors, who have already formed a committee for negotiations, are expected to engage in formal talks soon, aiming for a preliminary agreement by June.
The government, alongside its financial advisors (Rothschild) and legal representatives (White & Case), will initially focus on international bonds before addressing GDP-linked warrants and state enterprise debt.
Most of Ukraine’s sovereign bonds are held by large international fund managers.
As per EMAXX data, BlackRock, the world’s largest asset manager, has stakes in nearly all bonds, alongside PIMCO, Fidelity, and Alliance Bernstein.
The Russian invasion has severely impacted Ukraine’s economy, reducing its GDP by one-third in the first year of conflict.
However, in 2023, the economy rebounded with a growth of 5.3%.
The government projects a budget deficit of about $37 billion for 2024, which it intends to finance through domestic loans and financial aid from Western partners.
To date, Ukraine has received nearly $12 billion in international funding, a stark contrast to the $73.6 billion it received between 2022 and 2023.
No true precedent exists for debt restructuring in a country engaged in large-scale conflict.
While emerging nations like Zambia, Sri Lanka, and Ghana have restructured their debts post-pandemic and amid rising energy prices, Ukraine faces a unique challenge due to ongoing war, making accurate economic forecasting exceedingly difficult.
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