Threatened with Bankruptcy, Ukraine is on the Verge of Defaulting on its Debts

JAKARTA – Government Ukraine announced it had failed to reach an agreement with a group of foreign bondholders that includes financial giants BlackRock and Pimco to restructure its $20 billion worth of debt in the form of Eurobonds.

Bondholders in February 2022 froze debt for two years to Ukraine because of the conflict with Russia. However, the agreement will expire in August this year and bondholders hope Kiev can pay back the interest on its debt. Ukraine is on the verge of defaulting on its debt because it is not getting new debt, potentially damaging the country’s credit rating and complicating its ability to borrow in the future.

Formal talks between Kiev and an ad-hoc committee of creditors representing a fifth of the $20 billion in Eurobonds have been ongoing for nearly two weeks. Ukraine is urging bondholders to accept a sharp decline in the value of the debt as it tries to meet IMF demands to restructure the bonds to maintain access to international markets.

“Even though Ukraine and the Ad Hoc Creditors Committee did not reach an agreement on the terms of the restructuring during the consultation period, they will continue engagement and constructive discussions through their respective advisors,” according to a Reuters report, quoted from Russian Today, Tuesday (18/6/2024).

The Ukrainian government said in a statement it would also continue talks with other investors. Negotiations with bondholders will continue, Ukrainian Finance Minister Sergey Marchenko hopes an agreement can be reached by August 1.

According to the country’s economic minister, the country is in a delicate balance because it is used to being dependent on its partners. “Timely debt restructuring is an important part of this support. A strong army must be supported by a strong economy to win the war,” Marchenko said.

The report highlights that Ukraine offered to swap existing bondholders’ debt for five government bonds maturing between 2034 and 2040, as well as so-called sovereign contingent debt instruments (SCDI) linked to tax revenue collection.

The value will be determined in 2027 when the instrument turns into a bond to coincide with the end of the current IMF program. Investors have reportedly asked for an instrument that will generate stable cash flows from the start and the new bonds will pay 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 payout of USD700 million during the IMF program.

The offer translates into a written down of between 25% and 60% depending on SCDI performance. Ukraine also offers investors an option that only includes conventional bonds. Bondholders submitted two rival proposals, both of which would have provided a haircut of 20%.

Ukraine said that none of the bondholders’ proposals met 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.

Based on this year’s IMF report, nearly 100 member countries have applied for loans with total debt reaching USD 111 billion. Ukraine is in the top three with a debt of USD9 million. These funds are to overcome the economic impact of the prolonged conflict and strengthen foreign exchange reserves.

(nng)