Ukraine, Ad Hoc Creditors Committee Reach No Agreement on Eurobond Restructuring

Ukraine and the ad hoc creditors committee, representing around 20 percent of the outstanding amount of Ukraine's eurobonds, held negotiations and exchanged proposals for eurobonds restructuring from June 3 to June 14, but were unable to reach an agreement, including due to the unacceptability of the terms proposed by commercial creditors for the IMF and the Group of Creditors of Ukraine (GCU).

“The Adjusted Committee Proposal was shared with IMF staff, which assessed it on a preliminary basis as non-compliant with the IMF DSA [Debt Sustainability Analysis] targets. It was also shared with the GCU secretariat, which reiterated that any cashflows during the IMF program period needed to remain symbolic,” the ministry said in a statement to the London Stock Exchange on Monday.

“Although Ukraine and the Ad Hoc Creditor Committee did not come to an agreement on restructuring terms during the consultation period, Ukraine and the Ad Hoc Creditor Committee will continue engagement and constructive discussions through their respective advisors, and Ukraine will continue bilateral discussions with other Investors, with a view to making further progress and reaching an agreement in principle at the earliest opportunity,” the ministry said in the press release.

According to it, Ukraine's original proposal included two options with a nominal haircut ranging between 25 and 60 percent depending on the country's recovery over the IMF program period, while creditors first offered 20 percent and then agreed to 22.5 percent.

As the Ministry of Finance said, the initially proposed first option proposed receiving in exchange for 100 percent of the face value of existing Vanilla Bonds on 40 percent of the eurobond principal and Ukraine Recovery Instruments (SCDI) for 35 percent of the eurobond principal.

Vanilla Bonds would be issued in five series with maturity in 2034-2040 and fixed income with gradually increasing coupons (1 percent per annum in 2024-2025, 3 percent in 2026-2027 and 6 percent from 2028). Whereas the SCDIs would be converted into Vanilla Bonds based on a single test in 2027 with a face value dependent upon Ukraine's performance on tax revenues, subject to meeting conditions around real GDP levels projected in the IMF's baseline scenario.

The second initial version of Ukraine assumed that commercial creditors would receive only Vanilla Bonds worth 47.5 percent of the face value of existing eurobonds.

As the Ministry of Finance said, in the first case the flow of coupon payments would amount to about $680 million in 2024-2027, while in the second – about $725 million.

According to the report, these proposals were agreed with the IMF and the Group of Creditors of Ukraine (GCU) and aimed to respect the complementary targets of the DSA under the IMF program: a debt-to-GDP ratio of 82 percent of GDP by 2028 and 65 percent by the end of 2033, an average GFN-to-GDP ratio of 8 percent in the post-program period of 2028-2033, as well as 1-1.8 percent of GDP payments on external debt until 2028.

Ukraine also briefed the Ad Hoc Creditor Committee and the Investors that the baseline macroeconomic framework reflecting discussions for the 4th review of the EFF would be less favorable as compared to the macroeconomic framework reflected in the 3rd review of the EFF.

In addition, During the discussions, Ukraine highlighted that the cashflows in respect of the GDP-linked securities of Ukraine (the warrants) are included in the IMF DSA and, therefore, will need to be taken into account in the design of any restructuring solution for the eurobonds that meets the IMF DSA targets. In this connection Ukraine proposed removal of events of default related to or referencing the Warrants from the new instruments to be delivered as part of the Sovereign Proposal.

In turn, the Ad Hoc Creditor Committee, as part of the feedback, agreed with the possibility of exchanging existing eurobonds for two types of bonds, but proposed a lower level of write-off – 20 percent, which provides for the receipt of 40 percent of the debt from market bonds maturing in 2030-2036 and another 40 percent - recovery bonds with maturity in 2032-2038.

In addition, creditors asked to maintain the existing coupon on market bonds of 7.75percent, and also pay a coupon on recovery bonds – from 0.5 percent in 2024-2027, 2.5percent in 2028-2033 and 7.75 percent from 2034. In addition, the conditions they proposed for exchanging recovery bonds for market bonds, based on the results of the single test, were more favorable for them than in the Ukrainian proposal.

Ukraine, following feedback from the IMF and the GCU, informed the ad hoc committee that its proposal would not meet the targets of the debt transaction, and submitted for further development a modified base case and two “illustrative” alternatives, not yet agreed upon by the IMF and the GCU, to demonstrate its readiness to reach a deal.

Specifically, these structures included step and/or step-down structured bonds, zero coupon bonds, and macro-linked bonds, with varying haircut compositions ranging from 40 percent to 60 percent and coupon levels.

In the modified baseline case, which does not take into account the worsening macro forecast, “market bonds” are issued at 30 percent of the principal amount of eurobonds with a coupon of 4 percent in 2024-2027 and 6 percent from 2028; and recovery bonds – by another 30percent with a zero coupon in 2024-2027, 3 percent in 2028-2033 and 6 percent from 2034.

In the first alternative, Vanilla bonds would be issued at 40percent of the principal amount of eurobonds with a coupon of 1percent in 2024-2025, 3percent in 2026-2027 and 6 percent from 2028, and SCDI with a possible restoration to 35percent of the principal amount of eurobonds with a coupon of 6percent from 2028, subject to passing the single test in 2028.

The second alternative would feature eurobond holders receiving recovery bonds for 10 percent of the principal amount of eurobonds with a maximum potential recovery of up to 45percent, but this would also depend on a single test in 2027, including the possibility of completely zeroing out this part of the debt.

Finally, the ad hoc creditors committee responded to this clarified proposal from Ukraine with its own adjusted proposal, which increased the write-off amount to 22.5 percent by reducing the issue of recovery bonds from 40 percent to 37.5 percent of the principle, and also allowed the capitalization of 0.5 percent of the coupon on market bonds during the IMF program period, while maintaining the 7.25 percent per annum cash payment. The Adjusted Committee Proposal continues to allow for the potential full recovery of the concessions made in certain circumstances where there is performance above the IMF baseline, as described in the original Committee Proposal, the ministry said.

Ukraine was joined by its legal and financial advisors, White & Case LLP and Rothschild & Co, respectively, and the Ad Hoc Creditor Committee were joined by their legal and financial advisors, Weil, Gotshal and Manges (London) LLP and PJT Partners (UK) Ltd, respectively.

The Ministry of Finance said that as part of the ongoing restructuring process, the consultation period was designed to enable Ukraine to deliver to the Ad Hoc Creditor Committee and the Investors a restructuring proposal and to enable the Ad Hoc Creditor Committee and the Investors to directly engage and exchange ideas with Ukraine and its advisors. In addition, the Ad Hoc Creditor Committee were provided the opportunity to directly engage with staff of the International Monetary Fund (IMF) and the Secretariat of the GCU.