Ukraine’s Debt Sustainability Analysis (DSA), conducted by the International Monetary Fund (IMF) as part of the third review of the EFF Extended Fund Facility (EFF), provides for a partial debt write-off to achieve such sustainability, so it is likely that such a write-off will be one of the points of Ukraine’s expected soon proposal to restructure its Eurobonds, analysts interviewed by Interfax-Ukraine believe.
“The IMF sees our public debt as sustainable with a debt/GDP ratio of 82% in 2028. At the same time, the IMF predicts that without restructuring, Ukraine’s public debt will grow to 91.2% of GDP in 2028, which means that to achieve sustainability, Ukraine should reduce this debt by 9.2% of GDP, or about $21 billion,” said Oleksandr Parashchiy, head of research at Concorde Capital.
“From this we can conclude that the IMF sees the potential to write off the state debt this year by about $15 billion. This is a very large amount, given that the main object of such a write-off should be Eurobonds, the total amount of which is $21.2 billion,” he said in a comment to Interfax-Ukraine on Thursday.
ICU Group financial analyst Mykhailo Demkiv believes that the memorandum is vaguely written, that it is impossible to clearly define the parameters of the restructuring, and everyone can see what they want there, but the market is expecting the debt to be written off, “except for some super-confident people.”
According to him, the IMF may be deliberately giving the Ministry of Finance a kind of backlash in the negotiations so as not to bind it too much and put it in a worse position.
“Optimists expect 30-40% (of write-offs), pessimists expect 40-50-75%. Personally, I expect that there will be a write-off, I am guided by 40%,” the expert told the agency. According to him, proposals to write off 70-75% contradict the statements of the Ministry of Finance about plans to return to the market.
Demkiv added that he does not expect the Ministry of Finance to make payments on Eurobonds (repayment + interest payment) until 2027, although there are optimists who see room for this in the DSA.
“As for the warrants, I don’t know if they will be included in the restructuring perimeter. There have been reports that investors want to block the restructuring of the guaranteed debt (of Ukrenergo) so that these securities are not included in the perimeter,” the ICU Group analyst also noted.
According to Paraschiy, it is right that the IMF excluded debts to Russia in the amount of about $3.6 billion (principal) to analyze Ukraine’s debt sustainability, because it is obvious to everyone that Ukraine will not repay or service them.
“What I see as the problem with the IMF’s calculation (not worrying about the 82% in 2028) is the calculation of the public debt for 2028. If we calculate all of Ukraine’s debt receipts, which the IMF itself predicts, and take into account all exchange rate differences, it turns out that Ukraine’s public and guaranteed debt at the end of 2028 will be approximately 87.3% of GDP,” added the head of Concorde Capital’s analytical department.
He explained that according to these calculations, Ukraine will need to reduce its debt by less than $9 billion (or about $6.4 billion this year) rather than $21 billion to reach the ratio of 82% of debt to GDP in 2028.
“That is, the difference/error in the forecast is quite significant for the amount of potential write-off – more than twice. It is not clear how the IMF explains this difference, except that it has planned some contingent liabilities and “other” for the equivalent of 4.3% of GDP,” Parashchiy said.
According to Demkiv, the positive reaction of Ukrainian Eurobond holders to the publication of the updated memorandum with the IMF, which resulted in a 10% rise in the cost of the securities, up to 30-38 cents per dollar, is due to the IMF’s improvement of its assessment of Ukraine’s debt at the end of last year from 87.1% of GDP to 82.9% of GDP.
“If the value of the debt improves, then less needs to be written off. And another point that some have noted is that the wording on the debt-to-GDP parameter has become a little softer: from “must” to recommended,” the ICU analyst explained, adding that such a positive reaction could also be influenced by the allocation of EU funds and improved prospects for receiving funds from the United States in April.
As reported, the IMF in an updated memorandum on the results of the third review of the program with Ukraine noted that “a decisive restoration of debt sustainability and maintenance of adequate international reserves will require a fairly deep debt adjustment.” The Fund added that even with such a “deep adjustment,” restoring debt sustainability would also require substantial fiscal adjustment and exceptional donor financing.
The documents do not explicitly mention the desirability of partial debt relief, but the IMF states that the public debt should be reduced to 82% of GDP by 2028 and to 65% of GDP in 2033, while under the baseline scenario it will be higher by almost 9 percentage points and almost 6 percentage points, respectively, in these years.
The restructuring goals also state that gross financing needs should average 8% of GDP in the post-program period (2028-2033).
In addition to reducing the debt to 82% of GDP by 2028, the restructuring also aims to ease the debt service flow on external obligations to 1-1.8% of GDP (from $1.9 billion in 2024 to $3.5 billion in 2027).
According to the third review, the Ukrainian authorities and their debt advisors are finalizing technical work to design a debt operation that meets the objectives of the debt sustainability program. They plan to present initial proposals to creditors in the near future, in line with their intention to complete the restructuring by mid-year and before the debt moratorium expires in August 2024.
“As part of the treatment of external commercial debt, which we plan to complete by mid-2024, we will strive to obtain adequate debt relief, including from the restructuring of external commercial debt, in 2024 and beyond in accordance with the program parameters,” the Ukrainian authorities said in an updated memorandum on financial and economic policy.
As reported, on the eve of the IMF’s approval in late March 2023 of a new four-year, $15.6 billion EFF program for Ukraine, the Group of Official Creditors of Ukraine (the Paris Club) provided financial guarantees for this program following a meeting with representatives of the IMF and the WB. They provide for the extension of the standstill on Ukraine’s debt payments to the Group’s countries for the period of its validity (2023-2027). The condition for such a postponement is similar actions on the part of Ukraine’s private external creditors, mainly Eurobond holders.
Recently, Reuters reported that foreign holders of Ukraine’s Eurobonds are negotiating the formation of a creditors’ committee to conduct a restructuring dialogue that could begin on the eve of the IMF’s spring meeting scheduled to begin on April 17 in Washington.
Naftogaz of Ukraine on Friday improved a month-old proposal to restructure Eurobonds it defaulted on last summer, with the main changes affecting bonds maturing in 2022.
According to the presentation on Naftogaz’s website, it is proposed to increase the interest rate on Eurobonds-2022 from the date of approval of the proposal from 7.375% to 7.65% per annum, and also around April 15, together with overdue interest pay 5% of the principal amount of debt.
At the same time, Naftogaz offers to defer the payment of 50% of the principal debt for two years – until July 19, 2024, and the remaining 50% – until July 19, 2025, while in February it proposed to repay the entire issue on July 19, 2024.
As for the postponement of the redemption of Eurobonds-2026, the proposal remained the same: 50% for one year, until November 8, 2027, and another 50% until November 8, 2028.
Payment of interest on Eurobonds-2022 due on January 19, 2023, July 19, 2023, and January 19, 2024 is proposed to be postponed until July 19, 2024. For Eurobonds-2026 from November 8, 2022, May 8, 2023, November 8, 2023 and May 8, 2024 to November 8, 2024.
“Naftogaz wants to reserve the right to both early repayment of the overdue ones and to capitalize them.
Mobile operator Vodafone Ukraine, part of NEQSOL Holding (Azerbaijan), has completed regular interest payments on its $12.4 million Eurobonds.
“Despite difficult operational and financial conditions related to the war, the company continues to service its debt in full,” the operator said in a press release Wednesday.
According to the release, the principal amount of the Eurobond debt is now $400 million, as the company has already repurchased and redeemed $100 million in bonds ahead of schedule.
As reported, in early February 2020, Vodafone Ukraine placed five-year $500 million Eurobonds at 6.2%. The 144A/Reg S issue was marketed to international investors in Europe and the US. The coupon on the eurobonds is paid semi-annually.
On December 12, companies related to the managers of Kernel agro-industrial group bought Eurobonds of the holding with a total par value of $12.4 mln at a price of 45-46% of the nominal value, Kernel said in a statement on the Warsaw Stock Exchange on Monday evening.
According to it, there were four transactions with Eurobonds maturing in 2024 and a coupon of 6.5% per annum: par value of $2.4 million at 45.75% of par value, par value of $2.5 million (at 46%), par value of $5 million (at 45%), par value of $2.5 million (at 45.55%).
It is specified in the message that deals were made at over-the-counter market.
As earlier reported, in the middle of November the companies, related to “Kernel” management, purchased Eurobonds of the holding with a total par value of $29,43 mln at a price of 45-48% of the nominal value.
According to the annual report of “Kernel” in the middle of this year in the market were eurobonds of the company with maturity in 2024 and the nominal value of $297,314 million with maturity in 2027 and $297,724 million.
“Kernel was the world’s number one producer and exporter of sunflower oil before the war (about 7% of world production) and the largest producer and seller of bottled sunflower oil in Ukraine. In addition, the company was engaged in cultivation of other agricultural products and their realization.
The largest co-owner of Kernel, through Namsen Ltd. is Ukrainian businessman Andrei Verevskyi, with a 39.3% stake.
In FY2022 (July-2021 – June-2022), the holding posted net loss of $41 mln against $506 mln net profit in the previous FY. Its revenue decreased by 5% – to $5.332 bln, while EBITDA decreased 3.7 times – to $220 mln.
Ukrzaliznytsia has asked holders of its Eurobonds due 2024 for $594.9 million at 8.25% and Eurobonds-2026 for $300 million at 7.875% to defer all payments on them for 24 months.
“Given the group’s projections for fiscal years 2022 and 2023 and the financial plan for 2023 prepared and subject to approval by the Ukrainian government, and in particular against the background of the recent intensification of infrastructure shelling by Russia, the group believes it is time to initiate a consent request to complete the process before interest payments in January 2023,” Ukrzaliznytsia said in the stock exchange filings.
The company indicated that it expects to generate a net loss from transportation activities in 2022 and 2023, which it expects to mostly be offset by subsidies from the state budget, using them to cover operating and capital expenses. During this period, capital expenditures are also expected to be partially covered by financing from international financial institutions.
“Ukrzaliznytsia recalls that despite unprecedented economic and operational uncertainty, with vital government assistance it was able to successfully and fully service the interest payments due on its Eurobond debt in July 2022.
The company also noted that Ukraine was able to achieve a similar two-year deferral of payments on its Eurobonds in the summer.
“Since then, the operating environment and economic conditions have continued to deteriorate, and it is unclear when the war will end,” Ukrzaliznytsia stated.
The company, unlike the government, offers a reward for agreeing to defer payments of 0.5% of par.
On the deferred coupon payments also accrue interest at current rates, which the issuer can either pay in full or in part in the specified two years, or capitalize.
Applications from holders of Eurobonds-2026 are accepted until December 16, inclusive, and from Eurobonds-2024 – until December 20. A meeting is scheduled for December 21 on Eurobonds-2026, and the results will be announced on the same day for both issues.
The maturity of Eurobonds-2024 is proposed to be postponed from July 9, 2024 to July 9, 2026, and Eurobonds-2026 from July 15, 2026 to July 15, 2028, with coupon payments for each issue being made semi-annually.
The documents also state that Ukrzaliznytsia intends to treat the holders of both bond issues equally, but reserves the right to waive the “cross condition” at any time before the announcement of the results.
Prices of Ukrainian Eurobonds, which stabilized the week before last after a month-long 20% drop, resumed a slow decline last week, losing an average of 3% and dropping to a level near a historic low.
According to Bloomberg, at the short end, the losses were less than in its middle and at the long end, in particular, 2025 dollar Eurobonds fell in price by only 0.9%, to 21.9% of par, which corresponds to a yield of about 75.8% per annum. .
Eurobonds in dollars maturing in 2026-2030 were quoted at the end of last Friday in the range of 17.9-19.3%, which is on average 0.6 percentage points (pp) lower than a week earlier, and their current rates range from 63.5% to 42.7% per annum.
The price of the longest dollar securities maturing in 2031 and 2034-2035 fell the most – by an average of 4.6%, or 0.8 percentage points. – up to 16.7-16.5% of the face value, which corresponds to a yield of 38-35.4% per annum.
As for eurobonds in euros, bonds maturing in 2028 fell in price by 2.8% over the week, to 17.5% of par, and in 2032, by 4.7%, to 15.8% of par. Given the lower nominal interest rate compared to dollar securities, this corresponded to a yield to maturity of 50.6% in the first case and 34.2% per annum in the second.
At the same time, quotes of GDP-warrants remained at the same level last week – 26.2% of the conditional value.
