- Deal ends months of negotiations and public bickering
- Ukraine off the hook on debt repayments for four years
- Will free funds for war effort and help for the needy
- Dispute takes shape with Russia on bond repayment
(Adds joint statement in paras 7,10, IMF chief para 10)
By Natalia Zinets and Alessandra Prentice
KIEV, Aug 27 (Reuters) - Ukraine reached what its finance minister called a “win-win” deal with its largest group of creditors to ease repayments on its $18 billion debt, winning breathing space for an economy drained by the cost of fighting with pro-Russian separatists.
The agreement, which includes a write-down of 20 percent of the principal owed, ended months of tense negotiations aimed at helping to keep Ukraine on track with its International Monetary Fund-led bailout programme, plugging a funding gap and preventing a unilateral debt default.
The creditors, led by Franklin Templeton and including other asset managers, accepted a small increase in the coupon on most of the bonds to 7.75 percent and extended each maturity by four years. However, it must be approved by creditors outside the group.
Ukraine said the deal, announced on Thursday, would reduce the payments due over the next four years by $11.5 billion.
This will free up funds to help the war effort in the east, support the poor, cover purchases of Russian gas over the winter period and help keep the national currency, the hryvnia, stable according to a factsheet issued by the finance ministry.
“Everyone’s done well out of this deal. That’s why it’s collaborative. It’s not one side winning, it’s a win-win situation. We’re all now moving forward without putting the value of the bonds at any further risk,” Finance Minister Natalia Yaresko said late on Wednesday in remarks embargoed until Thursday.
The country’s sovereign dollar bond prices surged and debt insurance costs fell after the details were released.
Ukraine and the creditors said in a joint statement they would work together “to ensure the rapid implementation of the deal.”
But though Prime Minister Arseny Yatseniuk and Yaresko savoured a victory after months of gloom, there was a question mark over whether the other creditors would fall in line.
The joint statement appealed to other bondholders to approve the deal and urged the international community to provide non-debt support to Ukraine in the form of grants. In Washington, IMF chief Christine Lagarde said it was important that the agreement gained “broad support from all concerned eurobond holders”.
Yaresko said she hoped it was “highly unlikely” remaining creditors would reject the agreement and forecast that the process would be wrapped up by the end of October.
Dispute with Russia?
However, a dispute immediately took shape with Russia, one of Ukraine’s main creditors which holds $3 billion of Ukrainian debt in a eurobond that falls due in December.
In a quick reaction to news of the restructuring deal, Russian Finance minister Anton Siluanov said Moscow needed foreign currency and therefore could not participate in Ukraine’s restructuring agreement. This suggested that Moscow would insist on repayment in full of the $3 billion.
Yatseniuk, speaking at a government meeting, said Ukraine would not offer a better debt deal to Russia than to other creditors. Kiev has long insisted that the $3 billion owed to Russia is part of the sovereign and sovereign-guaranteed bonds to be restructured under the agreement.
Defaulting to Russia would carry fresh risks for Ukraine because the IMF is not officially allowed to continue lending to a country that is in default to another sovereign.
Ukraine’s 2017 dollar bond issue firmed 8.7 cents to trade at 64.5 cents in the dollar on news of the deal according to Tradeweb data, while the 2022 bond rose 10 cents.
An issue maturing at the end of September, which is also subject to restructuring, rose 4.3 cents to also trade at 64 cents.
Talks had been held up by disagreement with creditors on whether to provide Kiev with a writedown on the face value of the bonds. Kiev had initially sought a 40 percent ‘haircut.’
In the past few weeks Kiev had suggested that if it did not get a deal it was ready to risk international disfavour and suspend repayments, effectively going into default.
Favourable
Market players endorsed the deal terms as more favourable to creditors than initially expected when Ukraine had insisted on a 40 percent writedown.
Also, while a 20 percent writedown had been broadly priced in over recent weeks, a coupon of 7.75 percent and the inclusion of GDP warrants - new instruments linked to growth-recovery – appeared to be the main drivers for a 10-11 cent rally in bond prices.
“The maturity extension was a little bit better than expected because people were thinking they would extend even longer,” said one fund manager in London who holds the bond.
“And the coupon is not as low as some people fear so now everyone needs to run their spreadsheet to work out the NPV (net present value) of the bonds.” NPV refers to the worth of future bond payments in current terms.
But some said the deal might not be enough to put Ukraine’s economy on the right path.
“Clearly more generous to bond holders than I had thought,” said Exotix credit strategist Jokob Christensen. “I have a hard time seeing how this generous deal will help reduce the debt to 71% of GDP in 2020, which is one of the crucial targets in the operation..”
Gabriel Sterne, head of global macro at Oxford Economics also cast doubt on whether the deal would make Ukraine’s debt levels sustainable and added: “There is a strong likelihood that they will be back at negotiating table in before too many IMF reviews have passed.”
(Additional reporting by Sujata Rao, Karin Strohecker and Marc Jones in London; Writing by Richard Balmforth)
***Ukraine deal makes it rain in CEEMEA secondary
Investors are filling their boots with CEEMEA bonds on Thursday, led by Ukraine and news that a deal has finally been struck with creditors.
“It’s going absolutely nuts,” said one trader. “Everything is bid, everywhere.”
Ukraine’s 2017 notes are up a massive 10.5 points to 66.25, according to Tradeweb, while the sovereign’s 2022 notes are up 4.665 on their cash price to 57.515, according to Thomson Reuters Eikon prices.
The jubilation comes as Ukraine’s finance minister said that a “win-win” deal for restructuring US$18bn of debt had been agreed with a group of its largest creditors, Reuters reported.
Natalia Yaresko said late on Wednesday in comments embargoed until Thursday that the deal involved a 20% writedown on the principal and met all targets set by an International Monetary Fund bailout programme.
Part of the deal is expected to see a four-year extension on the sovereign’s debt.
“Assuming an 11% exit yield,” said a bond trader, “the new 2020 is worth 70 and the new 2027 is worth 63 … so an average of 66, which is where all the existing bonds now trade.”
It is not just Ukraine and its creditors that have settled their differences, and the rest of the CEEMEA market is also feeling the love.
Kazakhstan’s 2044s are up a touch over two points at 79.889, while Bahrain’s same maturity bonds are up 1.2 points at 84.226.
Even Africa’s unloved issues, which have had a hammering of late from low commodity prices, have caught a bid, with Ghana’s 2023s up by 2.25 points to 89.02.
Not to throw a dampener on the bond party, but some analysts are seeing Ukraine as fairly small-fry compared to some of the other problems facing emerging market investors.
“[Is Ukraine a] turning point in terms of the mood for EM?” said Tim Ash, a senior credit strategist at Nomura. “Not sure there, as the mother of all daddy elephants in the room here remains China, which is very difficult to call even for ardent China watchers.”
Away from the roaring secondary markets, Russia’s Norilsk Nickel has hired five banks for a Eurobond.
The nickel and palladium company, rated BBB– by Standard & Poor’s and Fitch, is considering a deal of around US$500m and could come as soon as September, according to one of the sources.
