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In a breakthrough for Ukraine's war-torn economy, the government has reached a preliminary agreement with a group of international bondholders to restructure $20 billion of sovereign debt. This deal, announced on July 22, 2024, marks a crucial step in Ukraine's efforts to stabilize its finances amidst ongoing conflict and economic challenges.
Finance Minister Serhiy Marchenko hailed the agreement as "an important step to ensure Ukraine maintained the budget stability and cash resources needed to continue financing its defence." The restructuring is expected to provide Ukraine with $11.4 billion in cash flow relief over the next three years, coinciding with the duration of the country's current International Monetary Fund (IMF) program.
Key terms of the deal include a 37% nominal haircut on outstanding international bonds and a revised payment structure. New bonds issued under the agreement will feature step-up coupon payments starting at 1.75% in 2025 and reaching 7.75% by 2034. Capital repayments are set to commence in 2029, offering Ukraine significant near-term fiscal breathing room.
The Ad Hoc Creditor Committee, representing 22% of Ukraine's sovereign bondholders, expressed support for the deal. The committee includes major asset managers such as Amundi SA, BlackRock Inc, and Amia Capital LLP. Victor Sabo, an emerging markets fund manager at Abrdn Plc, commented on the likelihood of approval: "I think they'll get the number of votes they need."
Market reaction to the announcement was notably positive. Ukraine's dollar-denominated bonds rallied, with some maturities gaining over 5 cents and trading at their strongest levels in about two years. The bond maturing in March 2035, for instance, added more than 5 cents to trade at around 33 cents on the dollar.
Prime Minister Denys Shmyhal emphasized the deal's importance for Ukraine's immediate needs, stating it would "free up resources for urgent needs, including defence, social protection and recovery." This sentiment underscores the critical balance Ukraine must strike between managing its debt obligations and funding its ongoing defense efforts.
The restructuring agreement comes at a pivotal time, just over a week before the expiration of a two-year debt suspension agreement struck in 2022. It also represents an unprecedented scenario of a country undertaking debt restructuring amid active warfare. The Ukrainian government has taken precautionary measures, passing a law allowing for temporary default if needed while finalizing the agreement.
While the deal marks significant progress, challenges remain. The restructuring does not include Ukraine's $2.6 billion GDP warrants, though the government has committed to ensuring "fair and equitable treatment" for warrant holders. Additionally, at least two-thirds of all bondholders must approve the deal for it to be implemented fully.
As Ukraine looks toward recovery and reconstruction, Finance Minister Marchenko expressed hope that this restructuring would "pave the way for Ukraine's market re-entry as soon as possible when the security situation stabilizes." The successful completion of this deal could indeed be a crucial stepping stone for Ukraine's economic rehabilitation and future access to international capital markets.
