Ukraine on the brink of default – Reuters

Kiev has failed to strike a deal with its international bondholders, according to a report

The Ukrainian government announced on Monday it had failed to reach an agreement with a group of foreign bondholders that includes financial giants BlackRock and Pimco on restructuring Ukraine’s $20 billion in Eurobonds, according to a report by Reuters.

In February 2022, bondholders granted Ukraine a two-year debt freeze in view of the conflict with Russia. But that agreement ends in August, and bondholders are anxious for Kiev to begin paying interest on its debt again. Ukraine could end up in default if new debt relief is not arranged, which would damage the country’s credit rating and complicate its ability to borrow in the future.

Formal talks between Kiev and an ad-hoc creditor committee representing a fifth of the country’s $20 billion in outstanding Eurobonds have been underway for nearly two weeks. Ukraine is urging bondholders to accept a steep writedown of the value of the debt as is tries to meet IMF demands to restructure the bonds in order to retain access to international markets.

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“Although Ukraine and the Ad Hoc Creditor Committee did not come to an agreement on restructuring terms during the consultation period, [they] will continue engagement and constructive discussions through their respective advisors,” the government said in a statement, adding it would also continue talks with other investors.

The negotiations with bondholders will continue, Ukrainian Finance Minister Sergey Marchenko confirmed, adding that he expected an agreement to be reached by August 1.

According to the minister, the country’s economy is in a “fragile balance” that hinges on consistent and substantial support from its partners. “Timely debt restructuring is a critical part of this support. Strong armies must be underpinned by strong economies to win wars,” Marchenko argued.

The report highlighted that Ukraine offered to swap bondholders’ existing debt for five sovereign bonds maturing between 2034 and 2040, as well as a so-called state-contingent debt instrument (SCDI) linked to tax revenue collection. The value of that instrument would be determined in 2027 when it transforms into a bond coinciding with the expiration of the country’s current IMF program.

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Investors had reportedly asked for instruments that would generate a steady cash flow from the outset and the new bonds would have paid interest at a symbolic rate of 1% for the first 18 months, rising to 3% for 2026 and 2027 and then 6%, for a total payment of $700 million over the course of the IMF program.

The offer translated into a writedown of between 25% and 60%, depending on the performance of the SCDI. Ukraine also offered investors an option including only conventional bonds.

Bondholders put forward two counter proposals, both of which would have carried a nominal haircut of 20%.

Ukraine said neither bondholder proposal met the IMF requirements.

Since the start of the conflict, the World Bank and IMF have provided more than $85 billion in state budget financing to Kiev, according to Reuters.