How $20 Billion Debt Restructuring Deal Eases Ukraine’s Wartime Economy

Ukraine has reached a deal that helps the country ease the debt burden – private creditors and the government reached a compromise to rewrite conditions for $20 billion of debt in Ukraine’s Eurobonds. 

Thanks to the deal, Ukraine expects to save $11.4 billion over the next three years by a combination of lower coupons and maturity extensions, the Ministry of Finance said on Monday, July 22.

The success was reached after the second round of negotiations – no one was holding their breath for a possible deal after the first one. The proposals from the government differed a lot from what bondholders wanted. 

The stakes of not reaching a compromise were high. Ukraine and bondholders agreed to pause payments right after Russia’s full-scale 2022 invasion against Ukraine, but the standstill was due to end on August 1. 

On that date, Ukraine would have declared default – a technical decision, but it could have spiked panic among Ukrainians were there no news about a successful deal. 

“Reaching a preliminary agreement with private investors before the August deadline is a favorable development for Ukraine, which needs to maintain good relations with investors as it seeks to raise funds for reconstruction,” Anna Kornyliuk, Data and Policy analyst at the Institute of Analytics and Advocacy told Kyiv Post. 

Another reason is the need for increased defense spending where every penny should be saved for the army. Defense spending has increased from 5 percent of GDP to 22 percent, and Ukraine must spend the equivalent of its whole pre-war budget to purchase the weapons and ammunitions needed to fight Russia’s invasion. 

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What’s inside the debt restructuring deal? 

“After the restructuring is completed, the maturity of the Eurobonds will be extended: the first repayment of $1.172 billion will take place in 2029,” the Ministry of Finance stated. 

“Without the restructuring, $9.381 billion (excluding capitalized interest) would have been due in principle between 2024 and 2029,” it said. 

“The agreement will ensure a saving of $11.4 billion in debt servicing over the next 3 years. By 2033, the savings will amount to $22.75 billion. This will free up vital financial resources that can be directed towards defense and social expenditure,” finance minister Serhii Marchenko added in the press release. 

The sum is substantial if you compare it to the volumes of financial aid Ukraine needs to sustain its economy. 

“It is more than the gross loans from the IMF over the past 2.5 years. So private creditors can be said to rank third in terms of the volume of support for Ukraine since the beginning of the war (behind the EU and the US),” Oleksandr Parashchii, head of research at Concorde Capital, told Kyiv Post.

The two sides were negotiating Eurobonds totaling $20 billion which Ukraine had issued during the period 2015-2021 maturing during 2024-2035. 

Bonds issued by Ukraine State Road Agency, Ukravtodor, were also discussed – but Ukraine settled for obeying the same conditions as the restructuring of the rest of Eurobonds. 

And for now, the Ministry of Finance hasn’t reached any compromise on details on how they will be restructured. 

Investors forgo almost 40 percent of the Eurobond debt 

The bondholders committee – Amundi SA, BlackRock Inc and Amia Capital LLP, and other investors holding 25 percent of the bonds – agreed to forgo 37 percent of the overall Eurobond debt upfront.

The reduction in the net present value of the debt is estimated at approximately 60 percent, according to the finance ministry. That means that the value of those payments negotiated now will be reaching a lower level in the future, further reducing the debt burden for the country. 

Reaching 60 percent can be done with various tools in the long run: lowering the bond principal amount, extending the payment period and lowering coupon payments. All of this is predicted in Ukraine’s bond deal. 

Another part of the deal includes contingent instrument, which would allow bondholders to yield a higher recovery if Ukraine's economy grows more than the IMF projections.

The bondholders agreed to exchange existing Eurobonds for new ones with compromise conditions

Ukraine will exchange the existing bonds to new ones: Bond A and Bond B. 

Bond A will cost 40 percent of its nominal price. Ukraine will start paying the coupons in cash from August 1, 2024 and pay them semi-annually – on Feb. 1 and August 1.

The interest rates for Bond A are estimated as 1.75 percent on or before August 1, 2025, 4.5 percent from February 2026 to February 2027, 6 percent from August 2027 to August 2033 and 7.75 percent from February 2034 onwards. 

Bond B’s price is 23 percent of its nominal price. But Ukraine will pay zero interest rate on or before February 2027. Then, from August 1, 2027 to August 1, 2033, the interest rate will be 3 percent, and from February 2034 onwards – 7.75 percent.  

These interest rates and a write-off from the nominal price are very close to the mid point between what bondholders wanted and what the government proposed. Previously, Ukraine proposed to pay from 1 to 6 percent – bondholders wanted 7.75 percent only. 

But a proposal for unconditional write-off was not mentioned by the creditors in June, which is the first striking difference to the first round of negotiations. In return, “the Ministry of Finance agreed to reduce the share of conditional debt relief,” according to Anna Kornyliuk. 

The compromise will also result in Ukraine paying the full value of the bonds later. “The maximum maturity of the newly issued bonds was reduced by 4 years: from 2040 in the June proposal of the Ministry of Finance to 2036 in the new agreement,” she added. 

Before restructuring, the maximum maturity term for the bonds was in 2035. 

The debt deal has yet to be formally finalized

Now, two-thirds of creditors must vote in favor of the decision. Though neither Ukraine's analysts, nor the government anticipates any surprises during the process. 

Ukraine will also negotiate GDP-linked warrants – where creditors get interest based on the success of the economy – that had been issued during Ukraine’s 2015 debt restructuring.

The country's president Volodymyr Zelensky should also sign a draft law allowing the government to impose a moratorium on foreign debt payments until October 2024. 

Apart from Ukravtodor, two other Ukrainian state enterprises should negotiate their debt: state-owned electricity transmission system operator Ukrenergo and state railway operator Ukrzaliznytsia.

The deal supports openness to investors in the future 

Ukraine pledges to pay and intends to return to capital markets in the future - the agreement between the creditors and government shows the country is transparent with its investors. 

That can become key to allowing Ukraine to return to capital markets as soon as investors see Ukraine as a stable investment destination. The way the deal is structured - division of the new bonds into two series - also helps in that process. 

“Since Series A bonds provide for a coupon increase to a market level starting from 2027, they will become a benchmark for Ukraine's credit risk. Such a benchmark is needed for an adequate assessment of the cost of new issuances,” Head of Research at Dragon Capital Olena Bilan wrote on Facebook. 

So despite the fact that Ukraine was negotiating new debt terms at the same time when Ghana or other countries discussed them, the reached compromise allows the country to have a better credit rating in the future than other countries.  

After all, Ukraine was forced to renegotiate debt only after it increased defense spending from Russia's full-scale invasion, not because of bad debt policy. 

And the investors felt the relief. “The positive market reaction to the deal, reflected in the price increase of Ukrainian Eurobonds, suggests that investors may have been expecting tougher restructuring terms, while the Ministry of Finance is keen to maintain good relations with investors,” Kornyliuk told Kyiv Post. 

(Updates with debt restructuring conditions in 16-19th paragraphs)