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Ukraine has launched a restructuring of $2.6bn of growth-linked debts that are seen as key to financing its war effort and which had threatened to drain billions of dollars from Kyiv’s postwar finances.
The country’s finance ministry on Monday unveiled an offer for investors to swap so-called GDP warrants into new bonds by the end of the year in return for a cash sweetener of up to $180mn and gradually rising interest payments, following months of talks.
Ukraine and a committee representing some of holders of the warrants both said on Monday that there had been “meaningful progress” on key terms of a restructuring in recent talks, although there was not yet full agreement on all the details.
The offer underlines how Ukraine is trying to prepare its finances for a potential peace deal with Russia as much as for the need to contain its debts if the war drags on.
Ukraine’s government needs to secure a new $8bn IMF bailout and new financial support from European backers by assuring them it will not spend too much of their money on payments to private investors.
“We are confident that we will secure support for a restructuring that safeguards our country’s fiscal stability and postwar reconstruction,” said Sergii Marchenko, Ukraine’s finance minister.
The committee said it “has indicated its willingness to participate in the exchange offer” if terms can be finalised.
The warrants were left out of Ukraine’s restructuring of more than $20bn of dollar bonds last year, given their complex payouts linked to economic growth, which would rise massively in a reconstruction-led economic boom.
“Without a restructuring, Ukraine would risk paying billions of dollars resulting from a postwar economic rebound, diverting vital funds away from defence, reconstruction and essential public services,” Marchenko said.
Kyiv defaulted on a payment of more than $600mn that was due on the warrants earlier this year. Last month the country broke off talks with warrant investors over their demands for more insurance against the potential for another restructuring if the war with Russia continues. However, negotiations restarted last week.
If investors do not accept the restructuring of the warrants, then Kyiv either faces billions of dollars in payouts in a postwar recovery, or the alternative of buying the warrants back at par, at a time when it is seeking to spend similar sums on US weaponry and shoring up its defences.
Ukraine is offering up to $180mn in cash as incentives for investors to take the deal and as partial compensation for this year’s missed payment. The cash level will depend on how many investors accept Ukraine’s offer and how quickly.
The country will then pay gradually increasing interest rates on the new debt before it matures, starting at 4 per cent and rising to 7.25 per cent.
In return, Ukraine will no longer be on the hook for billions of dollars in annual payments if reconstruction after Russia’s invasion leads to economic growth well above a trigger threshold of more than 3 per cent a year.
Based on previous IMF economic projections, these payments could have totalled over $6bn in the years ahead.
Under the warrant terms, Ukraine had to pay out 15 per cent of growth over the 3 per cent threshold, and then 40 per cent of any growth over 4 per cent. A cap limiting these payments to 1 per cent of GDP expired this year, increasing the urgency for Kyiv to restructure the warrants.
The warrants were originally issued in 2015 as an incentive for Ukraine’s bondholders to agree to take losses in a restructuring after Russia annexed Crimea in 2014.