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Restructuring: the final phase


On Wednesday, September 22, 2015, Ukrainian Cabinet of Ministers announced initiation of restructuring of public debt with partial write-off (the order of the Cabinet of Ministers №978-r as of September 22).

Technical default and the beginning of restructuring procedure

Everything is really very simple – there is a technical default (failure or inability to meet the conditions or violation of “covenants”) so the process of state debt restructuring begins. The Cabinet has already offered creditors to convene in London on October 14 (in respect of the norm to notify all parties 21 days prior to the meeting). If there is no quorum at the meeting of creditors, there will be another meeting. The meetings are already scheduled for October 29 and November 5 (in order to have time for the entire process completion by December 1, 2015).

Thus, many Ukrainians wrestle with the question: since we had been threatened by default and eventually failed to avoid it, what did the Ukrainian parliament vote for? The point is, we are speaking of a technical default, required by the agreement with the creditors' committee and mandatory for beginning of the restructuring procedure. Ukraine will not make payments on debt instruments according to the restructuring agreement. It should be noted that the strategically-structural default (which could occur if the unilateral application of a moratorium on foreign debt payments) or a full-scale structure default didn’t occur, so we managed to avoid the worst.

Strategically-structural default is the default scenario in which the debtor has the resources to meet the conditions of the debt agreement and to make payments, or it is technically possible to bring these resources, but there is no economic, financial and political expediency of it. This kind of default could trigger a number of unintended consequences, such as the closure of foreign markets for Ukraine for the next decade, a significant limitation of financial support to Ukraine, and many judicial and arbitration litigations. This scenario could sooner or later make all parties meet at the negotiating table, but it could be very expensive for Ukraine. Full-scale structural default in which the country does not have the resources or technical capabilities to find them, and has no political, economic and financial justification for it, would have ended as a nightmare for Ukraine, because it eventually would break to the gap in the IMF "Extended Funding" and in Ukraine's partnership with key donors.

The next step will be the voting at the meeting of creditors. In case of a positive outcome, the Ukrainian government will begin physical process of exchanging old debt securities for the new ones. These new debt securities will be completely identical for all participants (with a rate of 7.75% and due in 2019-2027, and of course with a warrant with indexation to the growth of Ukraine's GDP). The whole procedure may take some time, and this is why the Cabinet of Ministers and a special committee of creditors took time till December 1, 2015 for the resolution of all legal and technical issues.

It should also be expected that in the near future rating agencies will revise Ukrainian sovereign credit rating. There is nothing dreadful in this revision and in the technical default – so we shouldn’t panic when it happens. Once the restructuring is complete, the credit rating will be quickly restored, and Ukraine will be able to return to external debt markets in 2017 (according to the IMF "Extended Funding” program).

Eurobonds held by Russian Federation, the position of Shearman & Sterling and other difficulties

There are still a lot of legal and technical issues. It is very difficult to say something specific about Eurobonds held by Russian Federation until we get the verdict of IMF Board of Directors. Debt securities totaling USD 3 billion is likely to be qualified as private debt – due to the absence of direct legal basis for the Eurobonds qualification as "official external debt". We can expect that the IMF will support Ukraine in this important issue, especially considering high level of "politicization" and serious "corruption" component in these USD 3 billion.

As for Russian Federation we need to highlight the following points that are very possible:

(1) USD 3 billion Eurobonds will be recognized as "private debt";

(2) Russian Federation will refuse to participate in the restructuring and pull Ukraine into court and arbitration;

(3) This debt will be isolated, and the Russian Federation as the sole lender of it will be isolated too.

At the same time, once restructuring for a majority of creditors and other stakeholders is over, the "cross-default argument" will be offset. As a result, we can assume that the reluctance of the Russian Federation to participate in the restructuring will cost our eastern neighbor way more than a constructive dialogue. To a certain extent, strategic default (non-structural, since the weight of this issue in the total mass is negligible) because of this debt and the parties eventually will have to meet at the negotiating table, where hardly anyone will offer Russians conditions as good as offered now.

The internal conflict within the total mass of Ukraine’s creditors and the internal positional battle perfectly highlight all the tension. Shearman & Sterling LLP’s statement that its clients hold 25% of Eurobonds due on September 23, 2015 (for which there was a technical default) was a definite sign of alarm. Shearman & Sterling LLP demand to hold immediate negotiations with the special committee of creditors and Franklin Templeton for a review of a physical process of replacing the old "papers" for the new ones.

The group of bondholders with short-term positions led by Shearman & Sterling LLP has the biggest losses and technical difficulties, because the new dates will be in the longer term for them than those with the original repayment in 2018-2019. These players will do everything to make the process broken so Ukraine would be forced to carry out its external obligations. Of course, it may carry serious risks for the restructuring of the September “securities” ($ 500 million). And of course, there is also a high possibility of bluffing so October 14 will reveal a lot of things, and there is a high possibility that Franklin Templeton will strongly defend the position of a special committee of creditors in the internal struggle – because the transaction is a win-win for the vast majority of the parties.

The creditors who refuse to participate in the restructuring will not get the best conditions – and the principles of equality and parity will be met. The “holdout” cases will cost more to dissenting creditors, and they also will lead to a certain decision and the negotiation process. But the creditors in “holdout” status and especially the initiators of trials are unlikely to get such attractive terms as they have now.


Unfortunately, lately there have been a lot of statements from the Ukrainian populist politicians. The restructuring agreement of the special committee of creditors and technical conditions are objectively beneficial to all parties. Concerns about the GDP Growth Warrants are vastly exaggerated. We need to understand that the “base plate" of Ukrainian economy will be significantly different in 2021 and 2025. Even with the utmost optimism, under realistic average GDP growth of 3%, Ukraine will pay creditors about USD 2.25 to 4.50 billion in "today's money" (at a discount rate of future cash flows 8-14%). This is given a total write-off of USD 3.8 billion.

Sovereign debt restructuring will help to reduce the overall debt burden and direct "mechanical" pressure on the national budget of the country. We can expect a certain stabilizing effect for the Ukrainian currency and a positive effect on the Ukrainian "securities". Also it will be easier to manage liquidity and to coordinate cash flows. We must just understand that there will be no immediate magic and general stabilization of the macro environment will take some time (1-1.5 years). But, as for me, it is a victory.

Egor Perelygin, head of strategic planning unit of UniCredit Bank

Date: 24.09.2015


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