Explained | Ukraine races against the clock to secure debt restructuring

London: Ukraine is pushing to secure a debt restructuring before a two-year payment freeze agreed by holders of its $20 billion of outstanding international bonds expires at the end of August.

Russia's full-scale invasion in February 2022 shattered Ukraine's economy and finances, forcing it into a debt freeze to avoid a sovereign default. The restructuring effort is unprecedented in a country with a war raging and uncertain economic and fiscal prospects.

Here are some of the questions and issues facing Ukraine and its creditors.

Why is debt restructuring so important?

Ukraine's programme with the International Monetary Fund stipulates that the country should restructure its commercial debt—though the Fund does not prescribe a timeline. Kyiv itself also wants to retain access to global capital markets.

Slipping into a sovereign default—which would be the case if the country fails to either agree a restructuring or extend its current payment moratorium with bondholders—would curb its ability to borrow from multilateral lenders.

What debts are earmarked for restructuring?

Ukraine has international bonds with a face value of $19.7 billion outstanding across eleven dollar-denominated securities and two euro-denominated ones - maturing 2024-2035. Including past-due interest, Ukraine owes $23.6 billion on those bonds, according to calculations from JPMorgan.

Separately, Ukraine owes a further $2.6 billion from a previous pledge to investors that is also in the mix for a rework. The instrument - linked to GDP growth targets - was created during its 2015 debt restructuring in the wake of Russia's annexation of Crimea as a sweetener to creditors.

On top of that, Ukraine has international bonds issued by state-owned firms outstanding. Ukravtodor, in charge of building and maintaining roads, owed $700 million on its international bonds and grid company Ukrenergo $830 million by end-March, according to finance ministry data.

What happens in a debt rework?

A formal debt restructuring would likely see Ukraine's current bonds swapped for new bonds with different terms after negotiations with bondholders.

However, reaching a debt rework generally take months if not years - even when a country is not fighting a full blown war on its territory.

Is there an alternative?

Alternatively, Ukraine could request an extension of the current payment moratorium by a year, or maybe even longer, to gain breathing space for talks with its bondholders.

A group of official creditors—including Canada, France, Germany, Japan, the United Kingdom and the United States—have already agreed to a payment pause until March 2027.

Without an extension or a restructuring, Ukraine would face a hard default that would make obtaining financing from other lenders more complicated.

How big a hit might creditors take?

Most of Ukraine's dollar-denominated bonds currently trade below or around the 30 cents in the dollar mark—deeply distressed levels.

Getting debt relief could include maturity extensions, a reduction of the principal - so-called haircuts or lower or possibly even no interest payments in the near future - or a combination of the above.

Looking at how a possible debt restructuring could unfold, JPMorgan sketched a scenario under which the existing bonds would be swapped into four new ones maturing between 2028-2039 and with step-up coupon payments.

"In our view, a 30% haircut on the Eurobond stock including deferred interest along with some coupon relief would allow Ukraine to reach the IMF's required targets for debt sustainability under the baseline scenario," JPMorgan analysts said in a note to clients. The GDP warrants could be folded into a new bond that would mature in 2041, JPMorgan added.

What could the sequencing be?

Ukraine and its bondholders - which have already formed a committee - are expected to start formal talks soon, with a view to reaching an agreement in principle by June, sources familiar with the situation told Reuters.

They expect the government and its advisors - Rothschild on the financial side and White Case on the legal aspects - to focus on Ukraine's international bonds in the first instance, and tackle the GDP warrant and debt owed by state-owned companies down the line.

Who hold Ukraine's international bonds?

Ukraine's sovereign bonds are held by major fund managers.

Filings gathered by EMAXX show that BlackRock, the world's largest asset manager, had positions in pretty much all of the bonds - as did PIMCO, Fidelity and Alliance Bernstein.

How are Ukraine's economy and finances holding up?

The war has devastated Ukraine's economy and territorial integrity. Its economy contracted by one third in the first year of Russia's full-scale invasion, but grew by 5.3% in 2023, according to the country's statistics service which publishes a limited set of data.

The government expects a budget deficit of about $37 billion in 2024 and plans to fund it with domestic borrowing and financial aid from its Western partners. Year-to-date, Ukraine has received nearly $12 billion in financing from its international partners, compared to $73.6 billion in the years 2022-2023, according to the Finance Ministry.

Is there a precedent?

Not really. Emerging markets such as Zambia, Sri Lanka and Ghana have slipped into default and debt restructurings amid the economic hit from Covid-19 and a spike in energy prices. But countries generally don't restructure bonds with a war raging which makes fiscal and economic projections extremely difficult.