Strategic Considerations: The Ukrainian government is not in a rush to find a solution to its USD 2.6bn outstanding GDP warrants until the Extraordinary Revenue Allocations (ERA) loans for Ukraine are finalized. In this context, formal talks with holders of the warrants – the main remaining commercial debt obligation still to be restructured in line with the IMF’s debt sustainability targets – are likely to be 1Q25 business. Earlier this month, G7 countries approved an unprecedented USD 50bn in ERA loans to Ukraine, as well as a mechanism to help Ukraine service and repay these loans using the extraordinary revenues generated from immobilized Russian assets. Importantly, the IMF said it will view the ERA as grants rather than loans for the purposes of its Debt Sustainability Analysis (DSA), which is seen as a positive for the upcoming warrant talks.
- Amicable solution to the warrants is now expected in 1Q25
- ERA treated as neutral in DSA, which is expected to offer some headroom under debt stock and GFN projections versus targets
- Warrants are up at 73 cents
In the next couple of months, Ukraine will prioritize the work on USD 50bn ERA financing and does not expect to kick off formal talks with GDP warrant holders before the end of the year, said three buysiders following the situation. However, an amicable solution on the warrants, now expected in the first quarter of 2025, will likely be helped by the IMF’s treatment of the ERA as grants (rather than loans) in its Debt Sustainability Analysis (DSA), all the buysiders said.
The government was initially expected to approach the warrant holders shortly after the IMF’s Board approved the fifth review of EFF for Ukraine earlier in October, as reported by this news service. During the IMF/World Bank fall meetings in Washington DC last week, there was no sense that action was imminent, said the buysiders.
The Ukrainian ministry of finance did not respond to an emailed request for comment.
Earlier this month, G7 countries approved an unprecedented USD 50bn in ERA loans to Ukraine, as well as a mechanism to help Ukraine service and repay these loans using the extraordinary revenues generated from immobilized Russian assets (currently held mainly in Euroclear). The underlying immobilized assets were estimated at USD 173bn in June 2024 and are projected to reach USD 217bn by 2027, according to the IMF.
The ERA financing will more than cover Ukraine’s external funding needs for 2025, estimated at USD 39bn, although this number excludes direct military aid, said the buysiders.
The ERA financing has received the necessary approvals and is in the paperwork stage, with the first disbursements expected before the end of this year, the buysiders said. This makes Ukraine relatively immune to the outcome of the US elections on 5 November, commented a market participant.
Importantly, the IMF said it will view the ERA as limited-recourse debt and consider it as grants for the purposes of its DSA. According to an updated IMF DSA for Ukraine published on 18 October, the ERA financing is treated as neutral for the assessment of the DSA targets given its “extraordinary nature”.
“A significant implication of treating the ERA financing like that is that the debt stock and gross financing needs (GFNs) projections would offer some headroom versus targets for getting the deal with the warrant holders done,” said one of the buysiders.
In its updated DSA, the fund stated that “Ukraine's debt continues to be assessed to be unsustainable pending full implementation of the authorities' debt restructuring strategy.”
“Debt sustainability on a forward-looking basis is contingent on treatment of the remaining external commercial claims following the recent Eurobond exchange, strong policy commitments, and financing assurances and specific and credible assurances of debt relief that achieves GFNs that average of 8% of GDP over 2028-33 and public debt of 65%of GDP by 2033 (in a post-restructuring scenario and excluding ERA financing),” said the fund.
The Eurobond restructuring has provided “substantial progress” toward realizing these savings, the IMF said. However, several substantial risks remain, the warrants being one of them. The warrants “pose substantial fiscal risks if left untreated,” the fund said.
While no formal talks have started yet between the Ukrainian government and the warrant holders, in the last several months the debt management office has been engaging with warrant holders on a bilateral basis, said the same two buysiders.
“There is an ongoing dialogue”, said one of the buysiders.
The main difficulty for Ukraine would be convincing its official creditors that any proposed transaction in relation to the warrant holders meets comparability of treatment criteria, according to the market participant.
The warrants are up nearly three points on the secondary market since the start of September to just under 73 cents as of close of day yesterday (28 October), according to Cbonds. The contingent instrument was quoted at 60 cents in early August before the price was driven up by some funds on expectations of lower (than what eventually materialized) exit yields on the new Ukrainian Eurobonds and a more favorable treatment of the warrants relative to the bonds.
Meanwhile, the longer B bonds issued by Ukraine as a result of a recent debt restructuring have traded up by several points since the beginning of October, also according to Cbonds. The reason behind the move was the so-called “Trump trade”, with some market participants betting on a quick resolution to Russia’s war in Ukraine in the event of Donald Trump winning the US elections on 5 November. The trade may now be overdone, commented one market participant.
Of the originally issued USD 3.24bn, some USD 2.6bn warrants are still outstanding, as reported. Consent of over 75% of the outstanding aggregate warrants is required to introduce any changes to the terms of this contingent instrument, as reported.
The Ukrainian government said it intends to restructure its outstanding warrants – originally issued as part of the sovereign’s 2015 restructuring to offer an upside to investors – following the restructuring of the USD 20bn+ sovereign bonds that was completed in August. As a result of that restructuring, Ukraine cut its debt by USD 8.5bn.
The warrants are a contingent instrument that pays out substantial sums when Ukraine’s economic growth exceeds certain thresholds. The warrants pay no regular interest or principal. However, the payments are triggered once Ukraine's nominal GDP exceeds USD 125.4bn and its annual growth hits 3%. Until 2025, the annual payouts cannot exceed 0.5% of GDP, but after that and until expiry in 2041, there is no cap, as reported.
The government has the option to buy back the warrants by exercising a call option at par value, which is incorporated in the instrument’s terms. However, the option expires in August 2027.
by Yulianna Vilkos