Ukraine seeks OK under 14 note series for exchange offers; meeting set for Oct. 14 in London

By Susanna Moon

Chicago, Sept. 22 – Ukraine will hold a meeting on Oct. 14 in London for holders of 14 series of notes.

Ukraine is offering to issue new notes and GDP-linked securities in an exchange offer and is also soliciting consents to approve the exchange offer, according to 14 separate government notices.

The company is seeking consents from holders of the following note series:

• $1 billion 6.58% notes due 2016;

• $700 million 6¾% notes due 2017;

• $700 million 6¾% notes due 2017;

• $1.5 billion 7.95% notes due 2021;

• $550 million 9% guaranteed notes due 2017;

• $500 million 6 7/8% notes due 2015;

• $690 million 7.4% guaranteed notes due 2018;

• $2.25 billion 7.8% notes due 2022;

• $2.6 billion 9¼% notes due 2017;

• $1.25 billion 6¼% notes due 2016;

• €600 million 4.95% notes due 2015;

• $568,000,000 8 3/8% guaranteed notes due 2017;

• $1.25 billion 7½% notes due 2023; and

• $1.5 billion 7¾% notes due 2020.

In order to form a quorum, there must be at each meeting holders representing at least two-thirds of the aggregate principal amount of the outstanding notes. To pass, the measure at each meeting requires votes by a majority of at least three-fourths of those cast.

Recent news

As reported Aug. 27, Ukraine and an informal creditors’ committee agreed on the non-binding terms of a restructuring of 14 sovereign and sovereign-guaranteed eurobonds with an outstanding principal amount of $18 billion.

The committee comprises Franklin Advisers, Inc., BTG Pactual Europe LLP, TCW Investment Management Co. and T. Rowe Price Associates, Inc.

The agreement includes all 11 outstanding sovereign eurobonds of Ukraine and three sovereign guaranteed eurobonds of Ukrainian Infrastructure Fund (FinInPro).

According to the release, this agreement will allow Ukraine to fulfill a key element of the implementation of an International Monetary Fund-supported extended fund facility agreed to in March.

The IMF said in a separate news release that a total of $22.6 billion of debt is included in the IMF-supported restructuring, including the $18 billion of government eurobonds and government-guaranteed eurobonds that are covered by the agreement with the committee, $700 million of foreign-currency loans of state-owned entities with a sovereign guarantee, $600 million of City of Kyiv eurobonds, a $500 million Ukrzaliznytsia eurobond and $2.8 billion of external private Oschadbank and Ukreximbank debt.

Some of that debt has already been restructured, and some is not included in the agreement with the committee, the IMF said.

Restructuring terms

The main features of the agreement include the following:

• A 20% nominal haircut, yielding up to $3.6 billion of bond debt relief for Ukraine. This debt relief could reach up to $3.8 billion once the City of Kyiv eurobonds and sovereign-guaranteed international loans, which are outside of the scope of the agreement, are restructured.

The IMF said this takes Ukraine’s privately held sovereign, sovereign-guaranteed and quasi-sovereign debt to $15.5 billion from $19.3 billion;

• Eurobonds covered under the agreement will be rolled into nine new bonds, with principal payments rescheduled to fall outside of the 2015 to 2018 program period. Principal will instead be repaid in nine equal amounts from 2019 to 2027;

• A coupon of 7¾% on all nine series, representing an increase of 50 basis points compared to the blended average under current contractual agreements; and

• A value recovery instrument in the form of a real gross domestic product growth warrant, providing potential upside to holders from 2021 to 2040.

Specifically, the payment will be zero if real GDP growth is below 3%, 15% of the value of the GDP growth between 3% and 4% and 40% of the value of the GDP growth above 4%. Payments for years 2021 to 2025 will be capped at 1% of GDP for each year, and no payments will be made unless nominal GDP is higher than $125.4 billion.

The IMF said holders of a so-called “Russian bond” will be invited to participate in the restructuring on the same terms as other eurobond holders and will be treated the same as other bonds.

Looking ahead

Ukraine said the terms of the agreement are non-binding and are subject to appropriate legal documentation. The Ukrainian authorities have agreed to procure necessary implementing legislation before exchange offers are launched in the market.

Ukraine is expected to re-enter the capital markets in 2017, the release said.

“Ukraine gets a very immediate and very significant debt reduction worth up to $3.6 billion while maintaining its status in capital markets, a significant plus for our economy and our banking system,” minister of finance Natalie Jaresko said in the release.

“We get some $11.5 billion financing for our IMF-supported program, giving us the necessary financial breathing space. Importantly, we align our interests with our creditors. I call on all bondholders to support this operation.”

Committee representatives Igor Hordiyevych of BTG Pactual, Michael Hasenstab of Franklin Advisers, Penny Foley of TCW and Mike Conelius of T. Rowe Price said in the release, “This agreement is confirmation of the private sector’s confidence and belief in Ukraine and our willingness to invest in its future recovery.”

When completed, the IMF said the deal will reduce payments over the next four years by $11.5 billion of principal payments. The IMF also said the value recovery instrument is a “win-win creating a virtuous economic circle for Ukraine and its international commercial creditors who also have a vested interest in seeing the country’s economy thrive.”

According to the IMF release, Ukraine will continue servicing its debt, with the exception of a temporary technical suspension of payments on the eurobonds maturing in September and October to allow the completion of the debt restructuring.

“The announced parameters of the agreement will help restore debt sustainability and – together with the authorities’ policy reform efforts – will substantively meet the objectives set under the IMF-supported program,” IMF managing director Christine Lagarde said in the IMF release.

“Specifically, full implementation of the agreement will provide the targeted external debt service relief, reduce annual post-program gross financing needs as envisaged and place public debt on a clearly downward path.”

Tentative timeline

The IMF said the Cabinet of Ministers of Ukraine is expected to approve the term sheet and authorize the minister of finance to sign it on Aug. 27; the cabinet is expected to approve draft legislation and submit it to parliament on Sept. 1; and the cabinet is expected to pass a resolution to launch the operation by Sept. 14, with the operation expected to launch no later than Sept. 15.

Ukraine is advised by Lazard as financial adviser and global coordinator and White & Case LLP as international legal counsel. The committee is advised by Blackstone Group International Partners LLP as financial adviser and Weil Gotshal & Manges as international legal counsel.

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