No default in sight: What Ukraine has agreed on with private creditors
Illustrative photo (Getty Images)
Ukraine has reached an agreement with private holders of sovereign Eurobonds worth over $20 billion to restructure its debt, significantly easing the pressure on the state budget in the coming years.
Read the RBC-Ukraine review for specific details of the restructuring agreement.
On July 22, Ukraine released a statement on the London Stock Exchange, announcing that following closed meetings with the Committee of Holders of Ukraine's Eurobonds from July 12 to 19, principal agreements were reached regarding the restructuring of sovereign debt securities issued on international capital markets, amounting to $23.4 billion.
The International Monetary Fund (IMF) confirmed that the agreement aligns with the debt sustainability goals under Ukraine's Extended Fund Facility (EFF). The agreement was also approved by Ukraine's Creditors' Group.
Key terms of debt restructuring
Ukraine has agreed with creditors on a debt restructuring that will save $11.4 billion in debt servicing over the next three years and $22.75 billion by 2033. Existing Eurobonds will be exchanged for new ones, reducing the nominal value of the debt by 37%.
The first payments on the new bonds will occur in 2029, and the principal amount of debt, which was due by 2029, will now be spread over a longer period. The new bonds will have varying coupon rates, ranging from 1.75% to 7.75% depending on the year of payment. This will reduce the financial burden on Ukraine's budget and allow the freed-up funds to be directed towards defense and social needs.
These terms align with the creditors' proposals formulated during the first round of negotiations but also include some elements from the initial proposal by the Ministry of Finance.
Taras Kotovych, Senior Financial Analyst at the ICU group, said: "The debt restructuring agreement is closer to the creditors' proposals than to the initial proposal of the Ministry of Finance. The Ministry proposed a 25% write-off, with 35% of the debt becoming conditional, meaning it would be paid only if certain budget revenue targets were met. In the updated proposal, only 12% of the current debt becomes conditional, and 23% of the debt amount is exchanged for regular bonds, but without coupon payments in the coming years."
The agreements must include a fee for consent to the previous restructuring in 2022 and a deferred payment for 2021.
The restructuring process outlined in the terms does not require holding meetings and voting by Eurobond holders. Effectively, the voting will occur through the joining or not joining of the Eurobond holders to the agreements. Thus, the parties have until August 10 to publish the exchange offer, receive applications from holders for the exchange, and conduct the replacement of all Eurobonds according to the published terms, explains Taras Kotovych.
Why Ukraine needs debt restructuring
The IMF's support for the restructuring process is crucial. It ensures the stability of Ukraine's debt, opening opportunities for further financing.
"As a result, the International Monetary Fund, which effectively initiated this restructuring, remains satisfied. Ukraine's debt remains stable from the IMF's perspective. This means that the IMF can continue providing us with financing and encouraging other international creditors to finance Ukraine as well," said Oleksandr Parashchii, Head of Research at Concorde Capital investment company.
Financial analyst Andrii Shevchyshyn explains that restructuring allows Ukraine to gain time to address critical issues such as funding the army and rebuilding the country.
"In the next five years, this issue will not be acute, but eventually, the debts will still have to be paid. However, thanks to these agreements, we have time to sponsor the army and rebuild the country," said the RBC-Ukraine interlocutor.
The international agency Fitch Ratings downgraded Ukraine's long-term foreign currency rating from CC to C after the debt restructuring agreement with creditors for over $20 billion.
Ukraine faced the challenge of negotiating with private creditors to restructure its Eurobond debt amounting to over $20 billion by August to avoid default.
In June, Ukraine and the Special Creditors' Committee failed to reach an agreement on the restructuring terms. Ukraine proposed writing off 25% to 60% depending on the country's situation, while creditors were willing to accept no more than 20%.
