Ukraine failed to reach an agreement with a group of bondholders to restructure about $20 billion of international debt in formal talks, it said on Monday, raising the specter that the war-torn country could back down by default.
The deal with international bondholders that allowed Ukraine to suspend payments after Russia invaded the country in 2022 expires in August.
Ukrainian Finance Minister Serhiy Marchenko said that negotiations will continue and expects the government to reach an agreement by August 1.
Still, the country's dollar-denominated Eurobonds fell as much as 1.7 cents, with shorter maturities trading at deeply challenging levels between 25-30 cents on the dollar.
Formal talks with bondholders have been ongoing for nearly two weeks as Ukraine seeks to renegotiate its debt to maintain access to international markets while satisfying International Monetary Fund (IMF) demands for restructuring.
However, the government's offer and the bondholders' counteroffer showed just how far apart and the uphill battle Ukraine will face to restructure its debt in the coming weeks.
"While Ukraine and the Special Committee of Creditors did not reach an agreement on the terms of the restructuring during the consultation period, (they) will continue engagement and constructive discussions through their respective advisers," the government said in a statement, adding that they would also continue. bilateral negotiations with other investors.
Marchenko said that the country's economy is a "fragile balance" that depends on consistent and substantial support from its partners. "Timely debt restructuring is a critical part of this support," he said. "Strong armies must be supported by a strong economy to win wars."
Bondholders said the government's proposal called for a write-down that was "significantly in excess" of the 20% expected by markets.
This proposal "causes significant damage to the future investor base of Ukraine and the main goal of returning access to capital markets at the first opportunity," they added.
Ukraine could extend the suspension of payments after August, but prefers a longer-term solution of full debt settlement.
OFFER
Carrying out debt restructuring in the midst of a conflict that makes its economic and fiscal situation very uncertain has always been considered an unprecedented and monumental task for Ukraine
Kyiv's bilateral allies, who are pouring billions into the country to bolster its military effort and economy, don't want to see Ukraine divert the money to pay off its debt.
The G7 rich democracies agreed on Thursday to use proceeds from frozen Russian assets to provide Ukraine with $50 billion in loans. Since the beginning of the war, international partners, such as the World Bank and the IMF, have also provided more than 85 billion dollars , opens a new tab in the financing of the state budget of Kyiv.
Ukraine has offered to swap existing bondholder debt for five government bonds maturing between 2034 and 2040, as well as a so-called tax-linked sovereign debt instrument (SCDI), it said in a statement on Monday. The value of this instrument will be determined in 2027, when it will convert into a bond, coinciding with the end of the country's current program with the IMF.
Investors asked for instruments that would generate stable cash flow from the start, and the new bonds would pay interest at a nominal 1% for the first 18 months, rising to 3% in 2026 and 2027, and then to 6% for the total coupon payment in in the amount of 700 million US dollars during the IMF program.
This proposal resulted in a reduction, or "haircut," of between 25% and 60%, depending on SCDI's performance. Ukraine also offered investors an option that includes only ordinary bonds.
The bondholders made two counter-offers, both of which called for a nominal reduction of 20%, according to the government's statement, and allowed for the potential full return of the concessions.
The government has said that no bondholder proposal meets the IMF's requirements.
The two offerings consisted of a package of two types of instruments – a series of two bonds paying a coupon of more than 7%, and “reversion bonds” that had variable, step-up payments.
Ukraine has also proposed removing cross-default provisions between its international bonds and GDP warrants, which are linked to economic growth and for which it owes investors $2.6 billion.
