Ukraine urges bondholders to accept markdown on more than $20bn of debt

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Ukraine urged international bondholders to accept deep cuts on the value of more than $20bn in debt in order to help finance the nation’s war effort, after initial talks just months before a payment standstill expires failed to produce a deal.

Bondholders turned down a proposal by Ukraine to reduce the value of foreign currency bonds by up to 60 per cent in negotiations this month, the country’s finance ministry said on Monday.

Volodymyr Zelenskyy’s government is facing a tight deadline to secure the debt restructuring, which it needs in order to continue receiving a bailout from the IMF and to restore flows of private funding for reconstruction.

Bondholders granted Ukraine a two-year moratorium on payments in the months following Russia’s invasion in early 2022, but this is set to run out in August. The early talks on a restructuring have reflected deep investor uncertainty about the course of the war and how much debt Ukraine’s economy will be able to carry.

An investor committee representing about 20 per cent of the bonds proposed cuts of just over 22 per cent, but the IMF said this would fail key debt targets, the finance ministry said.

“Strong armies must be underpinned by strong economies to win wars,” said Sergii Marchenko, Ukraine’s finance minister. “As we approach the deadline, we must urge our bondholders to continue productive and good-faith negotiations, with more substantial debt relief” that can meet IMF targets.

The bondholder committee said on Monday that it was “committed to working with Ukraine to structure a transaction which may attract the requisite support from market participants”.

But it warned that Ukraine’s proposed haircut “was significantly in excess of market expectation” and “would risk substantial damage to Ukraine’s future investor base”.

Ukraine is looking for just over $5bn in debt relief from bondholders in the next year alone, when it expects to run a budget deficit of around $43bn to finance the war. This will be partly underwritten by $5.4bn in further IMF loans, and more than $28bn in other official support.

The finance ministry said on Monday that official creditors — a group that includes the US, UK, Japan and other governments that have financially backed Ukraine — had told bondholders they should receive only “symbolic” payments up to 2027.

As a replacement for the old debt, Ukraine has proposed a mixture of bonds that will pay symbolic interest until 2027 — initially 1 per cent before rising to 3 per cent — and securities that would pay out more if Ukraine beats tax revenue targets in the next two years.

If they perform, these securities could reduce the losses that bondholders take to about one-quarter over time, the Ukrainian finance ministry said. 

However, the creditor committee has proposed debt that would pay at least 7.25 per cent in the next few years as well as a “recovery bond” that would initially pay low coupons before raising them if the economy outperforms expectations.

Talks would continue and “we are confident that a satisfactory restructuring agreement can be reached in the upcoming weeks and before the current payment freeze expires”, Marchenko said.