By Karin Strohecker
LONDON (Reuters) – Ukraine’s international bondholders could face writedowns of between 30 and 42 percent in a debt restructuring, but Kyiv is likely to avoid a hard default, JPMorgan said in a note released on Thursday.
War-torn Ukraine is racing to restructure international bonds worth around $20 billion before the suspension of payments expires at the end of August.
A first round of formal talks with bondholders failed to produce an agreement, the government announced on Monday. This means that there is a risk that Ukraine will become insolvent if it cannot agree on a restructuring or an extension of the payment moratorium.
“The first round of talks sets a floor and a ceiling for the eventual recovery in bonds,” said Nishant M. Poojary, a strategist at JPMorgan, in a note to clients, acknowledging that the proposals from both sides were quite far apart.
“Going forward, the authorities and the committee will need to resolve some of the key differences regarding the assumptions and structure of the assistance effort and find a compromise.”
Ukraine has been in an economic crisis since Russia invaded in February 2022.
In its calculations, JPMorgan simulated a “meeting in the middle” package that includes elements proposed by both the government and the group of bondholders.
This hypothetical compromise would involve three different instruments: standard bonds, bonds with step-up coupons and a third instrument in which both the principal and the coupons would be adjusted based on average tax revenues, JPMorgan explained.
“The final debt cut for this package could be between 30 and 42 percent,” Poojary said, pointing to the write-downs that investors would face.
JPMorgan highlighted as positive that the proposals from both sides took into account a possible downside scenario for the country and included coupon payments from the outset, albeit at different levels. The government offered a symbolic interest rate of 1% at the start, while the bondholders proposed more than 7%.
Although the path to restructuring Ukraine’s debt looks bumpy, overall the development is positive, Poojary said, adding that the bank sees a “low probability of a hard default”.
“Despite the higher expected recovery rates than current prices, we believe there are many sticking points and subjective issues that need to be resolved before the final deal is reached,” he added.
According to Tradeweb data, Ukrainian dollar bonds are trading at a heavily discounted rate of 27 to 31 cents per dollar.
(Reporting by Karin Strohecker; editing by Christina Fincher)
