Ukraine’s Embattled Reorganization Chart
Ukrainian bonds and stocks cratered further following the IMF’s announcement of a replacement $18 billion four-year program toward a total $40 billion envelope, with an estimated one-third to come from private sector debt restructuring across a menu ranging from maturity extension to face value reductions. According to Finance Ministry statistics sovereign obligations were almost 75 percent of GDP in 2014, with one-quarter or $18 billion hard currency Eurobonds. Loan and bond coupons and maturities come to near $17 billion during the proposed extended fund facility and optimistic recovery values are around 40 cents/dollar after default declaration triggering CDS payout and settlement. The hyrvnia’s collapse propelled the FX share of overall debt to 60 percent of output, which in turn imploded with the loss of Eastern territory and Crimea on top of intractable recession and reserve depletion on the anniversary of the Maidan uprising. The IMF had disbursed $5 billion from last year’s post-rebellion agreement with another $12 billion due which will now be “front-loaded” after Kiev’s 2015 budget is passed and large gas price hikes go into effect. The debt/GDP ratio will be 125 percent with the additional assistance and a donor conference may seek grants in the coming months to stabilize the burden. Excluding the $3 billion Russian bond upon former President Yakunovych’s ouster, deferring Eurobond payments over the next three years could bring $10 billion in cash flow and interest relief. Moscow, US and Asian banks have also extended $3.5 billion in loans to be renegotiated separately. A principal haircut would aid marginally with sustainability but several big bondholders have 25 percent blocking ownership against collective action clause changes. That action earlier or later in Ukraine’s case would slice net present value to the low 20s mirroring the worst historical outcomes in Greece, Argentina, Ecuador and Russia. Officials envision a deal by June, an ambitious timeframe given the difficulty of consolidating 15 different instruments and the track record of average 10 months for completion according to trackers like Moody’s. $1 billion in CDS outstanding, with the next 12 months’ default probability at 90 percent, would also be handled at the same time as the distressed exchange, which would automatically place the sovereign in the “SD” rating category pending swap success.
The 2000 restructuring precedent after the Asian and Russian financial crises may be irrelevant with current external bond spreads at 4000 basis points twice the level then, and the East and Crimea firmly in the central government’s grip. Separatist rebels in the Donbas region have forced the military to retreat and humanitarian and defense spending cannot be clearly outlined in budget planning. Bank and corporate issuers have already reneged on servicing in a pattern the Finance Ministry and advisers Lazard may cite as leverage. Devaluation and sovereign yield spikes have proliferated throughout the CIS, with oil-rich Azerbaijan just breaking its peg as its governance and human rights behavior also await reorientation.
