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Ukraine asked to defer the debt service: experts have mixed views on this initiative (UPDATED)

The government asked the holders of Ukraine’s Eurobonds to consensually extend their maturity by 24 months, as well as to defer the payment of interest income on them for the same period. The decision is to be made by August 15. If the investors refuse, Ukraine will continue to service the securities according to the conditions of their issue.

This is stated in the resolution of the Cabinet of Ministers No. 805 dated July 19.

If the holders of the securities agree, during the next 24 months, interest income on the bonds will accrue at the existing rates, and additional interest income will be accrued on the amount of accrued main interest income at the same rates.

The Ministry of Finance was instructed to apply to the holders of Eurobonds to agree on such changes and also coordinate them with the Budget Committee of the Verkhovna Rada.

Ukraine also proposes the holders of GDP-linked warrants to consensually postpone payments on the warrants due in 2023 for 14 months, to lower the payment cap in 2025 to 0.5% (instead of 1%) of the 2023 year’s GDP, to extend the maturity of these instruments by a year, and at the same time to allow Ukraine to buy them back completely or partially in 2024–2027.

"In case the holders of government derivatives do not agree on the adjustments offered by these conditions, further payments on the derivatives will be made according to the conditions of their issue and placement," states the resolution of the Cabinet of Ministers No. 806 dated July 19.

Previously, on July 14, the IMF said it expects Ukraine to "continue servicing its debt in an orderly way".

What experts say about the postponement of payments on external debts

Stanislav Shlapak, head of the Center for Economic Research and Forecasting "Financial Pulse", notes: "I think the logic is as follows: the Cabinet of Ministers ordered to negotiate with investors on the said conditions, to ask for a standstill, and to agree on the terms. The reason is that we need this money now since there are problems with the budget and international aid. We receive $1 to $2 billion a month instead of the $5 billion we were promised, expenditures are rising every month, winter is coming, and we need to pump gas. The communications will follow this line."

Serhii Fursa, an analyst at Dragon Capital, thinks that the main idea is to freeze all payments for 2 years. After that, additional detailed negotiations on restructuring will be held. "In these circumstances, the Ministry of Finance presents the conditions as friendly as possible, making every effort for the restructuring to be considered amicable, so that Ukraine won’t be given default ratings. It’s still 40 days before the key payments are due in September, and it’s quite enough time to negotiate and agree with investors on the freezing of payments."

"When you have a budget deficit of $5 billion each month, and western aid doesn’t completely cover it, you are kind of not supposed to pay your debts to "the bourgeois". And it’s not about indecency or loss of trust. Investors would probably think we have a loose screw if Ukraine continued to service its debt in this situation like nothing happened. Moreover, while receiving money from Western taxpayers, Ukraine faces the situation where our partners imply that it’s not alright when the money sent to support social security suddenly goes to London and New York investors. And there are more and more implications that everyone has to pay, including private investors. The latter, being professional players, should bear responsibility for having ignored warnings from American intelligence for 4 months and not having sold Ukrainian securities," the expert pointed out.

He adds that the current price level of Ukraine’s sovereign debt (around 20% of the face value for most securities) has long accommodated both this restructuring and the continued war. "Compared with Ukraine, only Lebanon is now trading lower, a country that has suffered a years-long economic collapse praised by Ukrainian advocates of curative default," Fursa wrote.

Financial analyst Oleksii Kushch said the decision to restructure the government debt was right. However, it had to be made in March or April. And now, the government "had waited until the payoff of the warrant due on July 20 and announced that it woldn’t pay, which means it has encountered a default, be it called technical or real."

Analyst at CASE Ukraine Yevhen Dubohryz thinks that "after the Lugano conference, the decision to postpone payments looks not that 100% unexpected, but rather a bit hilarious. There were talks of wild billions there… and it was communicated that those insane billions were almost in our pocket. And now, the issue is around $1.4 billion by the end of the year."

He made two assumptions about why the postponement was needed at all. One is relatively bad: they don’t want to roll over (restructure, prolong) Ukraine’s debt. The second one is also relatively bad: someone was instructed to "save money" and is trying to save the best they can. Even though they often said in the Ministry of Finance that it’s better to pay your debts."

"Let’s get ready, fellow economists, to calm people down by saying that default, if it finally happens, is not a disaster and "all is lost". I hope it will help someone," the expert added.

Analyst at Forex Club Andrii Shevchyshyn thinks that the postponement on Eurobonds launches another quite painful, but inevitable cross-postponement on other loans, for example those of Naftogaz. That’s why we need the National Bank and the Ministry of Finance to state their positions on cross-defaults and other debts due in the near future.

Head of the analytical department of the National Interests Advocacy Network Illia Neskhodovskyi commented concisely: "Well done Ministry of Finance! All was done adequately, without unnecessary emotions, and correctly with respect to the creditors."

Analyst for the ICU investment company Mykhailo Demkiv noted that the prices of Ukrainian Eurobonds came to a point of 18 cents per dollar after the conditions of restructuring were announced. "The conditions are quite beneficial for the investors, without writing off part of the debt and with continuing interest accrual. However, given the prices, this may not be the last restructuring. After we win the war, we will probably have to negotiate again."

UPDATE. The Group of Creditors of Ukraine, which includes Canada, France, Germany, Japan, the United Kingdom, and the United States of America, strongly encourages bondholders to consent to Ukraine’s request to defer the debt service and to extend payment maturities for two years, as well as to adjust the terms of its GDP-linked warrants.

"In light of this, we, as official bilateral creditors of Ukraine, intend to provide a coordinated suspension of debt service due by Ukraine from August 1st, 2022 until end-2023, with the possibility of an additional year," says the statement published on the website of the Federal Ministry of Finance of Germany.

The Budget Committee of the Verkhovna Rada approved the resolution of the Government on the postponement of payments on Eurobonds for the next 24 months, i.e. until August 2024, wrote MP Yaroslav Zhelezniak.

The bonds sum up to $17 billion. The interest continues to accrue, but it will be paid off later. The government is actually capitalizing the interest, and it can cease the postponement and pay off the interest at any time.

"This is actually the respite we need. As of July 1, Ukraine has already allocated ₴62.1 billion ($2.1 billion) for servicing the government debt, which is the third largest item of expenditure for the last six months. This procedure will help us save around $5 billion to spend on other needs of the country during the postponement period," wrote the MP.

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