Conflict, creditors and a car crash: How Ukraine clinched a wartime debt
restructuring
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[September 03, 2024]
By Marc Jones and Karin Strohecker
LONDON (Reuters) - Just a few months after Russia invaded Ukraine, the
country's financial adviser, Rothschild & Co, handed Kyiv's debt chief a
thick black folder detailing major sovereign debt restructurings of the
past 30 years.
For Yuriy Butsa, 40, it would prove essential reading. He hadn't been
involved in the debt rework Ukraine required in 2015 after Russia
annexed Crimea and it wasn't long before he would need to draw on the
restructuring expertise.
Facing an economy crippled by the cost and destruction of the war, by
August 2022 Ukraine agreed with creditors to pause payments on its
bonds. With no end to the conflict in sight, last week the nation sealed
one of the fastest - and largest - debt restructurings in history.
Eclipsed in scale only by Argentina and Greece, the restructuring of
more than $20 billion of debt will save Kyiv $11.4 billion over the next
three years - crucial for both its ongoing war effort and its
International Monetary Fund program.
"A stable situation where no more question marks are out there can only
benefit Ukraine," Arvid Tuerkner, managing director for Ukraine and
Moldova at the European Bank for Reconstruction and Development, one of
Kyiv's big multilateral partners, told Reuters.
This account of how Ukraine's agreement with bondholders came together
is based on interviews with five sources on both government and investor
side who were involved in the talks and agreed to speak with Reuters on
the condition of anonymity.
REVIVING TALKS
Initial negotiations between the government and its lenders hadn't gone
to plan.
Talks in June had broken down after a couple of weeks with the core
committee of bondholders complaining that the writedown Ukraine was
demanding was "significantly in excess" of the 20% most had expected and
risked doing "substantial damage" to relations.
With less than two months till the August 2022 payment moratorium
expired, Rothschild arranged face-to-face meetings at the firm's elegant
Parisian offices on the leafy Avenue de Messine.
Rothschild declined to comment. The IMF did not immediately respond to a
request for comment when asked on a U.S. holiday.
Early on July 16, representatives of some of the world's top asset
management firms and their legal and financial advisers arrived in
Paris, where they joined Butsa, Ukraine's long-term legal advisers White
& Case and the Rothschild team.
A raft of meeting rooms, adorned with pictures of the famous Rothschild
vineyards, had been reserved to allow for joint discussions and private
strategizing.
The mood was pragmatic from the start, sources on both the government
and the creditor side said. Everyone had come in the hope of doing a
deal - even though both sides were still far apart.
EXCEPTIONAL UNCERTAINTY
There was reason to be back in talks.
As well as the looming deadline, the IMF, providing Ukraine with $15.6
billion of support, had just updated its projections. They had reflected
a worsening economic picture, but nevertheless gave a new base to work
from.
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People walk past the Rothschild & Co headquarters in Paris, France,
August 30, 2024. REUTERS/Sarah Meyssonnier/File Photo
Ukraine kicked off by setting out its proposal. Members of a key
bondholder group, representing some of the world's biggest asset
managers such as BlackRock and Amundi, got to explain their demands
too: that Ukraine restart 'coupon' payments immediately, offer a
path to a higher principal recovery and, importantly, "keep it
simple".
IMF experts were on call in both Kyiv and Washington in an
exceptional arrangement, according to one source. That was vital for
doing the labor-intensive modeling needed to work out what each
proposed compromise would mean for Ukraine's longer-term debt
sustainability.
By 4am on July 18 in Paris, or 5am in Kyiv and nearly 48 hours into
the process, another request was made to the IMF teams to rerun the
numbers. Some of those crunching the figures had barely slept.
The Fund's help was invaluable, its staff worked at breakneck speed
and helped to overcome multiple obstacles.
Discussions around how to tap Russia's frozen assets and confusion
around a new IMF policy designed to try and help it adapt to the
realities of a full-blown war had meant talks hadn't been able to
start at April's IMF Spring meetings as hoped, and were still
causing issues.
Butsa's team and the IMF were also adamant that there couldn't be
anything like the costly 'GDP warrants' used to sweeten its 2015
restructuring. Under their terms, Kyiv is required to stump up a
large chunk of its economic output if nominal GDP exceeds $125.4
billion and annual growth hits 3%.
But Ukraine was providing an alternative in the form of a simpler
GDP-linked bond, and creditors were also being offered the instant
coupon payments that they had wanted, starting at a rate of 1.75%
and eventually rising to 7.75%.
Structured to be eligible for the main bond indexes and therefore
easier to buy and sell, it meant the gap between the sides had been
as good as bridged. With just the fine print to finalize, those in
Paris made their exits as the packed city put the finishing touches
on its Olympics preparations.
CAR CRASH
The drama wasn't entirely over, however.
Driving back from the Polish airport where his flight had landed -
the most reliable route since Russia's invasion halted flights from
Kyiv - a driver turned across Ukraine debt chief Butsa's VW Golf.
No one was hurt, but Butsa was now sitting in an insurance office in
Lviv filling out forms whilst taking calls to finalize the statement
that the $20 billion restructuring had, in principle, been agreed.
The resounding final result from the bondholder vote was more than
97% support.
(Reporting by Marc Jones and Karin Strohecker in London; additional
reporting by Libby George; editing by Elisa Martinuzzi and Christina
Fincher)
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