Ukraine may have foreign debt frozen for 2 years to avoid $20 billion default

Ukraine’s creditors this week voted on a government proposal to delay payments on the war-torn country’s international bonds by 24 months, as Kiev hopes to avoid a confusing $20 billion default.

Bondholders have until 6:00 p.m. EDT on Tuesday to decide whether to support or reject the Ukrainian government’s proposal, which faces a $5 billion monthly funding shortfall and liquidity pressures. after the invasion of Russia.

Time is of the essence: the country has a $1 billion issue that matures on September 1.

Creditors will likely wait until relatively close to the deadline to vote, said a person familiar with Ukraine’s thinking.

Investors should support the debt freeze, the person added.

In announcing his proposal, Ukraine’s Finance Minister Sergii Marchenko said he had “explicit indications of support” from some of the world’s biggest investment funds, including BlackRock, Fidelity, Amia Capital and Gemsstock.

Creditors of Ukravtodor and Ukrenergo, two state-owned companies that have government guarantees on their debts, also have until Aug. 9 to vote on a similar freeze plan.

Default?

The two-year moratorium on repayment of external debt would allow Ukraine to avoid a contractual or legal default, as any change in the terms of the bonds would have the support of creditors, Rodrigo Olivares-Caminal, a professor of banking and finance law at the Queen Mary University of London.

However, creditors may question whether an insurance against the country’s default, the Credit Default Swaps (CDS), should come into play, as a deferral of payments can be considered a credit event by the International Association of Swaps and Derivatives (Isda , the acronym in English).

Credit rating agencies may also classify this as a “selective default” or “default”.

While investors should support the freeze, it is unclear whether the country may still need a medium-term debt restructuring.

“It’s just a pause button – we don’t know what Ukraine’s situation will be in a few months or a few years,” said Luiz Peixoto, emerging markets economist at BNP Paribas.

“Investors are already preparing for a debt restructuring.”