Ukraine reached a bond-restructuring agreement with about half of its private-sector creditors on Thursday after five months of negotiations. Below are the details of the terms of the agreement and what happens next.
- Which bonds are included?
The deal covers $18 billion of Ukraine’s foreign debt, including 11 government Eurobonds and three state-guaranteed Eurobonds issued by the Ukrainian Infrastructure Fund. Not included is about $4.6 billion of quasi-sovereign bonds, $2.8 billion of which has already been restructured.
- What are the terms?
The principal value of the securities will be written down by 20 percent, or $3.6 billion.
The exchange will be made on a bond-by-bond basis, Finance Minister Natalie Jaresko said in a interview late Wednesday, meaning holders of current 2015 notes will receive new securities that mature in 2019 and holders of the 2023 bond will receive new notes maturing in 2027.
- How do GDP warrants work?
The deal also includes a so-called GDP growth warrant that will kick in from 2021 through 2040. The main conditions for triggering the instrument are that nominal gross domestic product must exceed $125.4 billion, compared with a projected $84.3 billion in 2015. Real GDP growth, meanwhile, must be 3 percent or higher for the warrant to be activated, according to the following parameters:
a) 15 percent of the value of the GDP growth between 3 percent and 4 percent
b) 40 percent of the value of the GDP growth above 4 percent
Between 2021 and 2025, total payments are capped at 1 percent of GDP
- What happens next?
Ukraine’s Finance Ministry is planning to start the bondholder approval process no later than Sept. 15, after pushing legislation through parliament. On most bonds, creditors then need to be given at least 21 days notice to review the terms before meetings can be called for a vote.
To pass the deal, 75 percent of bondholders must vote in favor at a meeting in which two thirds of creditors are represented. Quorum falls to one third at a second meeting if it isn’t reached first time around.
Ukraine hopes to complete the entire voting process by the end of October, which means that a $500 million principal payment due on Sept. 23 and a 600 million euro ($678 million) payment due on Oct. 13 will be temporarily suspended.
- What if some bondholders don’t accept the new terms?
The Franklin Templeton bondholder group holds a majority of more than 75 percent in some of the debt, according to Jaresko, which means they will be able to push through the new terms on those.
In most of the bonds, the committee holds less than 75 percent, meaning that other creditors can obstruct an agreement. Ukraine won’t be able to give better terms to holdouts, Jaresko said.
“Anyone can choose to decline,” she said. “Then they have to choose to deal with whatever the consequences are and whatever the legal implications are of being a holdout.”
Some bondholders, including Yerlan Syzdykov, who helps oversee $254 billion, including Ukrainian Eurobonds, at Pioneer Investments, have already said they will back a deal. Russia, which holds a third of the debt being restructured, said it won’t take part.
- What are Ukraine’s options with the $3 billion owed to Russia?
Ukraine can either pay the bond in full, convince Russia to accept a restructuring or default. Each option has some downsides, including the potential of Ukraine losing IMF funding.