Ukraine's bonds have tanked following the IMF spring meetings last week, due to investor concern over a downside scenario for the war-torn country and a fast-approaching deadline to reach a restructuring deal before August, said a source close to the situation, a bondholder and a market participant.
Despite this week’s positive news of the US Congress approving a USD 60bn aid package for Ukraine, the sovereign’s bonds were still on average three to four points down on the week, said the bondholder and the market participant.
The IMF’s messaging on Ukraine in Washington DC has been perceived as disappointing by many investors, triggering a sell-off in the market from the end of last week, said all three.
“The investors who have been following Ukraine closely have found the frenzy [in Ukrainian bonds] that followed the IMF meetings puzzling,” commented the source close to the situation.
However, those who are not as close to the situation came out of the IMF meetings with three main concerns, said the source.
These concerns are the feasibility of interest payments during the IMF program, given the alleged resistance from some G7 members, the efforts by the IMF’s Strategy and Policy Review department to talk up the downside scenario for Ukraine, and the urgency of getting a deal done in the next two months, said the source and the market participant.
“The IMF made it clear in DC that there is no plan B for Ukraine, and that a debt operation needs to happen now,” added the source close.
At the same time, the fund stated very clearly that Ukraine's downside case needs to be properly captured in the debt restructuring, which “poured some cold water on bondholders' expectations”, according to the bondholder.
The existing moratorium on Ukraine’s external debt payments runs out at the end of July, with interest payments scheduled to resume on 1 August, as reported.
At the long end, Ukrainian paper (2035s) reached highs of 30-31 on 22 March, but was down to nearly 25 cents on Monday (22 April), recovering this morning (24 April) at just above 26 cents, said the market participant.
At the short end (2024s), Ukrainian bonds got as high as 38 on 22 March, before stabilizing between the end of March and mid-April, and then dropping to 32-33 cents on Monday, the market participant said. They were seen a touch above 33 this morning, he said.
The price move on Monday alone was 2-2.5 points, which is almost 10% of capital, the market participant added.
“Long end is doing better in the sell-off vs front end, curve is flattening,” he commented.
In the meantime, Ukraine’s GDP warrants have proven more resilient than its bonds in the last week.
The warrants traded 56-57 in mid-April, softened to 53 on Monday, and recovered some of the losses this morning at just over 54 cents, according to the market participant.
Next step: a government restructuring proposal
The government is currently engaged in a back-and-forth with official creditors and the IMF before it approaches its bondholders with a restructuring proposal, said the source close. This is to make sure any proposal is aligned with the country’s bilateral creditors who have already provided two-stage relief to Ukraine. And “to see where they sit with the restructuring that provides cash flows to private creditors during that period,” said the source.
The approval of US aid has been under-appreciated by the market, said the source. The development effectively means that Ukraine’s 2024 risk will be financed — and from 2025 onwards “we are counting on the Russian assets [frozen in the West] to come in”, said the source.
According to a media report from earlier this week, the Ukrainian government is expected to send international bondholders a proposal to restructure its USD 20bn of Eurobonds in the next week or two.
The source close confirmed this expectation, commenting that the process will start with the exchange of ideas between respective legal and financial advisors of the Ukrainian government and the bondholders before it gets to the NDA signing stage.
The bondholder said an exchange menu for the bondholders could potentially include a value-recovery instrument, which captures a range of downside scenarios, including the low-probability worst case scenario (where recovery is close to zero).
A steering committee (steerco) of Ukrainian bondholders was officially formed earlier this month, as reported, with PJT Partners engaged as financial advisors and Weil, Gotshal and Manges as legal advisors to the steerco. Amundi, BlackRock, and Amia Capital are among the funds on the steerco.
Ukraine is advised by Rothschild and White & Case, its long-term financial and legal counsel, respectively.
by Yulianna Vilkos and Giovanni Riva