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 The country has received the nod from the International Monetary
Fund (IMF) for a $17.5 billion loan package, and the fund assumes
Kiev will get $15.4 billion from talks with creditors.
Right now Ukrainian bonds, with the exception of a $3 billion chunk
held by Russia and a $1 billion U.S.-guaranteed issue, are trading
at less than half their face value, a reflection of what creditors
fear they will have to swallow as a writedown, or haircut, on their
initial investments.
With total debt likely close to or over 100 percent of gross
domestic product, reserves that can buy just a month's imports, a
fragile ceasefire in the east of the country and a chunk of
territory (Crimea) annexed by Russia, some players reckon a haircut
of up to 70 percent is possible
But some are starting to speculate that pushing back debt payments
over the four-year life of the IMF loan may give the country what it
needs. It could do this either by extending maturities or by
stopping payments for a while with bondholders' agreement, through a
moratorium.
"You know Ukraine's debt is unsustainable but you don't know how
unsustainable," said Gabriel Sterne, head of global macro at Oxford
Economics. "What would make sense in this very tight liquidity
situation is a complete moratorium, calling a stop to all payments
for a period."
That would be an amended version of reprofiling, or pushing back
bond maturities, and would give Ukraine breathing space while it
figures out what resources it has. Pushing back debt repayments for
four years should provide Ukraine with a $15 billion cushion, the
Institute of International Finance said last month.
In such a situation, easing short-term debt payment pain can improve
solvency while a longer-term restructuring is then agreed. In the
most optimistic scenario, a significant haircut may not be needed at
the end of the grace period.
Ukraine has set itself a June deadline to conclude the
restructuring, an ambitious timetable because one creditor, Franklin
Templeton, holds around $6.5 billion of outstanding Eurobonds,
Exotix strategist Jakob Christensen notes.
Greece's restructuring after it was first floated in 2011 took four
months, but Ukraine has the added complication of Russia, which has
already said it will not restructure its $3 billion.
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But negotiating a reprofiling that could possibly include a grace
period and maturity extensions of up to 10 years, could be concluded
relatively quickly, Christensen said, advising clients to hold on to
Ukraine's 2015, 2017 and 2023 dollar bonds.
The bonds have rallied this week after ratings agency Fitch told
Bloomberg that Ukraine bondholders may escape a full-fledged
restructuring.
And if bondholders would benefit, so would Ukraine, many argue,
citing Kiev's standing with the global investor community and its
hopes to eventually return to bond markets. Deutsche Bank economist
Robert Burgess says Ukraine would need to bear in mind that
aggressive restructuring carried long-term costs.
IMF research has found sovereign spreads returned to pre-crisis
levels faster after reprofiling exercises, compared to when the face
value of bonds was cut, while the time taken to regain market access
was also shorter, Burgess noted.
"There is a potential cost and the question is whether the cost is
bigger than the benefit," he said. "It's a thin line."
(Additional reporting by Marc Jones and Chris Vellacott in London;
Editing by Mark Trevelyan and Toby Chopra)
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