UPDATE 2 - Ukraine faces US$290m of coupon payments tomorrow
Ukraine is to make coupon payments of around US$290m on its sovereign bonds on Tuesday, a finance ministry official told investors on a conference call today.
Yuriy Butsa, government commissioner for public debt management at Ukraine's finance ministry, told investors today that the country would make coupon payments on its sovereign bonds due on Tuesday, according to Simon Hinrichsen, a portfolio manager with Denmark's Sampension, who was on the investor call.
After last week's invasion of Ukraine by Russia there was speculation that Ukraine would move to preserve precious foreign currency resources for more pressing needs rather than make the payment.
The US dollar bonds were issued on September 1 2015 after the restructuring of the sovereign’s debt following the 2014 Maidan uprising in Kiev which subsequently saw Russia take control of the Crimea region of Ukraine.
The instruments have an annual coupon of 7.75%, payable in two semi-annual amounts on March 1 and September 1. The bonds were designed to mature in nine roughly equal amounts each year between 2019 and 2027. Around US$7.6bn of principal remains outstanding.
The bonds' prospectus states that Ukraine must send the money to the bonds’ trustee and paying agent, Bank of New York Mellon, 15 days before it is due to be paid to bondholders. Given that date was before Russia launched its invasion, it is likely that Ukraine has already made that transfer. It is not clear whether the country could have asked for that money back, assuming the payment has been made.
Bank of New York Mellon did not immediately respond to a request for comment on whether it had received the sum from Ukraine. The country’s finance ministry did not respond either.
The tranche of the bonds due to mature this coming September is currently priced at 70 cents on the dollar, according to Refinitiv data, although there is very little liquidity. The longer maturities are priced at around 50 cents on the dollar.
If no payments are made within 10 days of the due date, that would be an event of default, according to the prospectus.
According to Refinitiv, the bond maturing in September is held by a range of institutions, including Pimco, Capital International, RBC, Aviva, JP Morgan Asset Management and Loomis Sayles.
Butsa was speaking on an investor call to promote an auction of “military government bonds” to “meet the needs of the Armed Forces of Ukraine and to ensure the uninterrupted provision of the state's financial needs under the war”. The bonds, to be auctioned tomorrow, will have a one-year maturity and a nominal value of H1,000 (US$34). The yield will be determined by the auction.
"Support and assistance"
Separately, the governor of the National Bank of Ukraine has written to other central bankers asking them “to stop supplying Russian and Belarussian banks with banknotes in foreign currency”.
“Ukraine feels the support and assistance from many countries of the world. We hope that our peers and partners will help us exert additional pressure on the Russian Federation,” Kyrylo Shevchenko wrote.
On Friday, Fitch downgraded Ukraine to Triple C. “The military invasion by Russia has resulted in heightened risks to Ukraine's external and public finances, macro-financial stability and political stability,” it said. “The invasion represents a severe negative shock to a broad range of key credit metrics. Ukraine has fairly low external liquidity relative to sovereign external debt service of US$4.3bn in 2022, and expected capital outflows will further weaken its external financing position.
“Public finances would additionally be impacted by greater military expenditure, and the ability to roll over domestic debt will be severely constrained.”
If Russia manages to defeat Ukraine militarily and install a puppet government, that is likely to lead to a default, according to a debt restructuring lawyer. “If there is a regime change in Ukraine as a result of the war and Ukraine becomes subject to sanctions, there will be a default and investors are likely to be left stranded,” he said.
Western authorities are also stepping up their efforts to prevent Russia from accessing the international financial system, via a range of punitive sanctions. Data from the Bank for International Settlements showed foreign banks had US$121.5bn of outstanding claims to Russia at the end of September.
Banks in Italy were the biggest lenders, with US$25.3bn of outstanding loans (or claims), followed by French banks, with US$25.2bn of loans. Other major bank lenders by country were Austria (US$17.5bn), US (US$14.7bn), Japan (US$9.6bn), Germany (US$8.1bn), Netherlands (US$6.6bn), Switzerland (US$3.7bn), UK (US$3bn) and South Korea (US$1.7bn). China does not provide data to BIS.
Total foreign claims to Ukraine were US$14.5bn at end of September. That included US$4.1bn from Austria, US$3.7bn from France and US$1.7bn from US.