Exclusive-Ukraine sounds out bondholders on debt restructuring, new financing -sources

By Karin Strohecker and Jorgelina do Rosario

LONDON (Reuters) -Ukraine has been sounding out major investors over plans to restructure the country’s $20 billion in international debt and the possibility of raising fresh financing, three people with knowledge of the discussions told Reuters.

Interactions have intensified in recent weeks led by the head of the debt management office, Yuri Butsa, who has been seeking investor feedback, they said.

Talks with bondholders were due to start early next year. But concerns that international backing for Ukraine may be waning and few indications that the conflict is close to abating have brought fresh momentum into debt talks, the sources said.

The U.S. in late September passed a stop-gap funding bill to avoid a government shutdown that did not include aid for Kyiv while fighting in Israel and Gaza was dominating the news flow as policymakers and investors land in Marrakech for the International Monetary Fund and World Bank annual meeting to discuss their most pressing issues.

Bondholders agreed in August 2022 two a two-year payment freeze after Russia’s invasion in February shattered its economy and finances, forcing it into a sovereign default. Most of Ukraine’s bilateral lenders have suspended repayment obligations until 2027 – and some analysts had expected Ukraine might ask its bondholders for a matching extension.

Butsa had many direct meetings with creditors, one source familiar with the discussion said on condition of anonymity. Ukraine’s ambition is to tap markets early, the source added, to help shore up access to financing while its International Monetary Fund programme runs to 2027, the person said.

Talks are informal and bondholders have yet to form a creditor committee, the sources added.

Ukraine’s finance ministry and debt management office said they would provide comment later.

Under the four-year $15.6 billion IMF loan programme approved in April, the Fund stipulated that Kyiv has to overhaul its debt, but did not prescribe a timing.

FROM DEBT REWORK TO FRESH FUNDS

As part of a debt restructuring, Ukraine would issue new bonds to existing holders once losses on existing debt had been agreed upon. But given the risk inherent in lending to a nation at war, investors said they would favour some form of guarantee or backstop by Ukraine’s partners to agree to the deal.

The market wants to see some sort of credit enhancement, said a second source familiar with the situation, adding this might prove more difficult for Ukraine to obtain given how much public money had already flowed into the country. Credit enhancements help reduce the default risk by the issuer and thereby borrowing costs – for example through guarantees.

In addition to issuing bonds as part of the debt restructuring, Ukraine also told investors it is weighing options to raise fresh additional financing, the sources said.

The options include collateralized and guaranteed structures that could form part of a restructuring solution and potentially facilitate financing for the country, the third source said.

These could see Ukraine’s international partners – either multilaterals or individual countries – provide collateral for new bonds, akin to the so-called Brady bonds issued by Latin American countries in the late 1980s that were backed by U.S. Treasuries.

Whether Ukraine would be able to raise fresh funds from capital markets is unclear, as IMF programmes generally do not envisage that countries can seek non-concessional funding whilst undergoing a debt overhaul.

How willing large asset managers would be to lend more money to Ukraine also remains to be seen, the first source said.

The real challenge is making sure that new money commitments from private-sector creditors really materialise, said the first source. Ukraine required much more than $1 billion a year, the person said.

(Reporting by Karin Strohecker and Jorgelina do Rosario in London, and Olena Harmash in Kyiv, editing by Philippa Fletcher)