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Thursday, 14 December 2017

Ukraine bondholders escape – for now

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Emerging Markets

IMF pledges up to US$18bn but calls for restructuring of state gas company Naftogaz

Ukraine’s bondholders have been spared, for now, from contributing to the country’s bailout of up to US$27bn, proposed by the International Monetary Fund, but some could still face being restructured under certain conditions alluded to by the IMF.

The price of the Eastern European country’s US$1bn bonds maturing on June 4 have risen by 1.75 points to 98.75 since the plan was set out last Thursday. The proposals have to be approved by the IMF board, including Russia, in late April but are likely to be in place to meet that payment.

One analyst called the package “a temporary holding programme to buy time” before tougher decisions needed to be taken about whether to allow loans to be used simply to repay Russia, which holds a US$3bn bond issue due December 2015, and private bondholders.

“I think PSI [private sector involvement] could be back on the table very soon after the May presidential elections. I doubt Western taxpayers will want to see their taxes going to pay off bondholders and Russian creditors,” said Tim Ash, head of EM research ex-Africa at Standard Bank.

“We don’t envisage, at this point, a debt restructuring. But let’s wait for the staff report to be published so we can get into more detail on that,” said an IMF spokesman.

The two-year standby programme will see between US$14bn and US$18bn come from the IMF alongside bilateral loans principally from the US and EU. That will enable US$4.2bn of debts to be repaid to the IMF itself over this period.

But it is unclear at this stage if liabilities of Naftogaz and other state-backed companies will be fully honoured. The IMF has reserved the right to negotiate a restructuring of the state energy company with Ukraine’s new government after the country’s scheduled May 25 election.

“I doubt Western taxpayers will want to see their taxes going to pay off bondholders and Russian creditors”

Naftogaz has a US$1.6bn bond issue maturing on September 30. It also owes significant sums to Gazprom, Russia’s state gas company, which is also its principal supplier. Until now, Naftogaz has secured a discount for these supplies from Gazprom, partly as recompense for leasing Sevastopol port to Russia.

But having lost possession of the port, Ukraine’s agreement with Russia has in effect ceased. In any case, Gazprom has already said it will insist on a full market price for its gas from April. That will weaken Naftogaz’s finances further.

Full price

The IMF has also asked Naftogaz to charge its consumers a full price as part of the deal. Previously, the Ukraine government provided the company with state funds to subsidise the discount to consumers. A Naftogaz official said last Thursday it would double its prices accordingly from May 1.

A restructuring could see the state put more equity into the group. It is unclear at this stage what fate awaits creditors, such as Gazprom and bondholders. The Naftogaz September bonds only rose two points to 95.5 last Thursday, reflecting the uncertainty remaining among investors.

“A key step is the commitment to … move retail gas and heating tariffs to full cost recovery,” said IMF mission chief Nikolay Gueorguiev. “The programme will focus also on improving the transparency of Naftogaz’s accounts and restructuring of the company to reduce its costs and raise efficiency.”

Last October, Naftogaz only paid a US$78.5m coupon on its 2014 bond issue at the end of a month-long grace period. If no payments are made in the future, that might trigger a cross-default for all of the country’s bonds.

Gueorguiev said the company’s deficit last year amounted to 2% of Ukraine’s GDP. The state registered a 4.5% deficit in addition. “Without policy action, the combined budget/Naftogaz deficit would widen to more than 10% of GDP in 2014,” he said.

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