Ukraine holders OK exchange for 13 note series; one meeting adjourned

By Susanna Moon

Chicago, Oct. 15 – Ukraine received approval to restructure 13 series of notes at noteholder meetings held Oct. 14 in London.

A meeting for the $3 billion 5% notes due 2015 was adjourned for lack of a quorum, and a new meeting has been set for Oct. 29 in London, according to a government notice.

As announced Sept. 22, Ukraine is offering to issue new notes and GDP-linked securities in exchange for the existing notes. It solicited consents to approve the exchange offer.

The company obtained consents from holders of the following note series at the meetings, according to 13 separate government notices:

• $1 billion 6.58% notes due 2016;

• $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 million 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 needed to be holders representing at least two-thirds of the principal amount of the outstanding notes at each meeting. To pass, the measure at each meeting required votes by a majority of at least three-fourths of those cast.

Ukraine’s Ministry of Finance said that settlement of the exchange offer for the 13 series of bonds would result in the restructuring of roughly $15 billion of Ukraine’s external debt, achieve a 20% debt reduction for Ukraine and allow Ukraine to avoid paying any of the previously scheduled $8.5 billion of principal falling due under these bonds during the next four years.

A final decision on settlement of the entire exchange operation will be taken by the Ministry of Finance immediately following the adjourned meeting of the 5% noteholders. If the decision is taken to proceed, it is anticipated that settlement will occur and new securities will be delivered to noteholders in mid-November.

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, the 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.”

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.

-Angela McDaniels contributed to this report

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