A group of owners of Ukrainian Eurobonds intends to seek payments from the government on these securities in exchange for writing off part of the debt.
Investors are asking for money
Recently, The Wall Street Journal, citing anonymous sources, reported that a group of owners of Ukrainian Eurobonds (bonds denominated in foreign currencies, not necessarily euros, which are issued by the Ministry of Finance and freely sold to everyone - “Apostrophe”) intends to demand from the government Ukraine will resume payments on these securities. The publication does not provide an exact list of these owners, but it is known that among them there are such international investment funds as BlackRock and Pimco.
This group of investors owns 20% of Ukrainian Eurobonds, which are currently in circulation and have a par value of about $20 billion. Investors want a debt restructuring that would include writing off much of it in exchange for the government starting to pay interest on the bonds starting next year. According to preliminary data, they want to receive $500 million a year. Let us recall that in 2022 Ukraine agreed with commercial creditors to defer payments on Eurobonds for two years due to the Russian invasion. This agreement expires in August 2024, and the Ukrainian government would like to achieve another deferment of payments.
“The operating principle of investment funds is such that interest is paid on the securities in their portfolios,” Ivan Kompan, founder of First Kyiv Investment Club, explained to Apostrophe the logic of Eurobond owners. “This means that the invested capital is working. However, Ukraine has not paid interest on its debts for more than two years and has not carried out restructuring. Thus, the owners of Eurobonds do not receive anything, and they are not happy with this situation. So they say: let’s write off part of the debt, but start servicing what remains.”
According to the expert, even if a significant part of the debt is written off, such an agreement will be beneficial to bondholders. Many purchased them already during the full-scale invasion, when Ukrainian securities fell sharply in price and were trading at 25-30% of their original value. This significantly increases the yield of any payments on such bonds.
Suppose a Eurobond worth $100 provides for an annual payment of $10, that is, its yield is 10% per annum. But if you buy such a bond for $25, it will pay the same $10 per year, but for the new owner the yield will already be 40% per annum. And even if he agrees to write off half of the debt, the payments will already be 5 dollars, but still 20% per annum.
The IMF is on the side of Ukraine
The desire of private investors to receive income from bonds puts the Ukrainian government in a difficult position. After all, he does not have the money to service the external debt. This year, almost all taxes collected in Ukraine are allocated to defense needs, and all civilian sector expenses are financed by external financial assistance. And no one will allow American or European taxpayers' money to be paid to private owners of Eurobonds.
In addition, the IMF and the G7 countries, which are today Ukraine’s main donors, have provided a deferment for servicing our national debt until 2027. Of course, they will not be satisfied with the situation if Ukraine begins to pay off payments to private investors earlier than with them.
Therefore, in the coming months, the government will have to conduct difficult negotiations with investors in order to reach terms acceptable to all parties for the restructuring of Eurobond debts.
As Daniil Getmantsev, head of the Verkhovna Rada Committee on Finance, Tax and Customs Policy, told Apostrophe, such consultations have already begun. According to him, there are two main ways to solve the problem with Ukrainian securities. The first is a deferment of payments until 2027, similar to that provided to Ukraine by international donors, the second is a full-fledged restructuring with the issuance of new securities with a longer maturity and the possible write-off of a certain part of the debt in exchange for extended compensation and guarantees for creditors.
Moreover, according to the people's deputy, negotiations continue not only with the creditors mentioned in the publication of The Wall Street Journal, but also with other investors. After all, the article talks about the owners of only 20% of Eurobonds. At the same time, in order to restructure debts, it is necessary to obtain the consent of at least two thirds of the creditors. The International Monetary Fund is providing support to the Ukrainian government in the negotiations.
“The debt agreement with external creditors is part of the IMF program, which must provide its expertise and umbrella for such negotiations,” says Daniil Getmantsev. “Under this program, for the period from 2024 to the first quarter of 2027, Ukraine should save $11.8 billion on payments on external public debt, including $4.6 billion in 2024.”
Default is not a disaster
According to the head of the expert and analytical council of the Ukrainian Analytical Center, Boris Kushniruk, today the option of deferring debt servicing is more acceptable for Ukraine. At the same time, restructuring and write-off should be agreed upon later.
“It is quite obvious that Ukraine will ultimately have to agree with investors to write off part of the debt, since it will not be able to fully repay all debts after the war,” the expert told Apostrophe. “But now it is impossible to predict when the war will end, what the conditions for the end will be, what state the domestic economy will be in, and other circumstances. Therefore, it is inappropriate to determine specific parameters for restructuring today. This can be done when the results of the war are summed up, based on which it will be possible to say what is Ukraine’s ability to service its obligations.”
In addition, in his opinion, debt restructuring is inappropriate for another reason.
“Ukraine continues to borrow money to finance current budget needs, and it is usually much more difficult to find buyers for securities while simultaneously relinquishing some of the obligations on previously issued ones,” explains Boris Kushniruk.
Negotiations with creditors should be completed by August. According to Daniil Getmantsev, the likelihood that it will not be possible to reach an agreement with them at all and a default on Eurobonds will be declared is very low.
However, even a default will not be fatal for the Ukrainian financial system.
“War is a classic force majeure, which allows us to change lending conditions and postpone the repayment of debts,” explains Boris Kushniruk. — Of course, if Ukraine refuses to resume servicing the bonds, investors can file lawsuits in international courts. But the judges will almost certainly side with Ukraine and confirm that in these circumstances it has the right to change the terms of debt repayment.”
There is also no need to fear that deferment of interest payments on bonds will supposedly negatively affect the authority and credit ratings of Ukraine.
“Today, the most important partners for us are the IMF and allied countries,” says Ivan Kompan. “Therefore, it is more important for us to maintain the reputation of a solid partner in relations with them, and not with commercial investment funds, on which the stability of the financial system of Ukraine depends much less.”
At the same time, according to him, for bond owners the risk of non-fulfillment of borrowing conditions is unpleasant, but quite common.
“Reputable investment institutions generally do not buy Ukrainian debt due to their low credit rating. Therefore, the owners of Eurobonds are predominantly speculative hedge funds that purchase risky assets with high returns. And they are always ready for one or another issuer to refuse to service its debts. And the talk that in this case they will no longer return to the Ukrainian market is not true. If the government offers a sufficiently high yield on its securities, then there will always be buyers for them,” the expert concluded.
