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Ukraine has agreed a 20 percent debt haircut

An expert: “It is definitely a positive signal”
1 September, 2015 - 10:44

Ukraine and international creditors have agreed a 20 percent debt haircut. Prime Minister Arsenii Yatseniuk broke the news at a Cabinet meeting on August 27. “There will be no Ukrainian default, much awaited by our enemies,” he said.

Let us recall that the Finance Ministry spent almost five months negotiating on restructuring 22 billion dollars worth of foreign loans. According to Yatseniuk, the haircut amounts to 3.6 billion dollars. The remaining foreign loans have had their maturity extended by four years. Even so, the coupon rate on our eurobonds has changed little, now amounting to 7.75 percent per annum.

In exchange for the lenders’ concessions, Ukraine pledged to issue new securities, called Value Recovery Instruments. They will have to be serviced for 20 years, starting in 2021. Ukraine will make payments to foreign lenders holding these securities only if its GDP will reach 125.4 billion dollars and annual GDP growth will exceed three percent. That is, should the GDP grow at zero to three percent per annum, the lenders will receive no money. If the growth will exceed three percent, but stay lower than four percent, Ukraine will pay 15 percent of the excess. If economic growth will surpass four percent, the annual payment will reach 40 percent of the excess. Furthermore, annual payments will be capped at one percent of Ukraine’s GDP during the first five years of these securities’ maturity period. Also, the Cabinet of Ministers has retained the right of early redemption of these instruments.

By the way, according to IMF estimates, Ukraine’s GDP will not reach 125.4 billion dollars before 2019, while the debt included in the Restructuring Agreement with the Ad Hoc Committee of Creditors stands at 18 billion dollars.

However, it is not quite clear what will be the fate of the three-billion-dollar-worth Russian loan. Russian minister of finance Anton Siluanov stated that Russia would not participate in the Ukrainian debt restructuring. In turn, Yatseniuk said that Russia would not get better terms than other lenders on debt obligations of Ukraine.

The Cabinet of Ministers unanimously supported the agreement on debt restructuring on August 27. However, the debt relief mechanism described above will be launched only if the parliament passes a bill on it, which the Cabinet undertook to prepare and submit to the MPs by September 1.

Under the terms of the agreement, all payments on the loans other than the annual coupon will be terminated until the new instruments’ issue, which will be serviced from 2021. It means that the coupon payment scheduled for September 23 will not take place.

The Day asked chief financial analyst of the Expert Rating agency Vitalii SHAPRAN to provide his assessment of the agreement with lenders.

“This is a total victory. A junk-rated nation, teetering on the brink of default, suddenly gets such splendid restructuring terms. In addition to writing off nearly four billion dollars, lenders have assumed the responsibility that they do not normally assume. That is, if the GDP falls or grows by less than three percent, the state will be exempted from all payments. Such things rarely happen in the world, because lenders typically are not concerned with the nation’s economic situation.

“It is definitely a positive signal, and the rate’s stability is also very good. Such terms are very soft for a country in such economic distress, burdened with such large debts.”

By Maria YUZYCH, Natalia BILOUSOVA, The Day

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