Ukraine urges bondholders to accept reductions on more than $20 billion in debt

Stay informed with free updates

Simply sign up War in Ukraine myFT Digest – delivered straight to your inbox.

Ukraine has urged international bondholders to accept deep discounts on more than $20 billion worth of debt in order to help finance the country's war effort, after initial talks just months before the end of a payment moratorium failed to reach an agreement.

Bondholders rejected a proposal by Ukraine to reduce the value of foreign currency bonds by up to 60 percent in negotiations this month, the Ukrainian Finance Ministry said on Monday.

Volodymyr Zelensky's government faces a tight deadline to secure debt restructuring, which it needs to continue receiving an IMF bailout and restore private financing flows for reconstruction.

Bondholders gave Ukraine a two-year deferral on payments in the months following the Russian invasion in early 2022, but this is set to expire in August. Early restructuring talks reflected deep uncertainty among investors about the course of the war and how much debt the Ukrainian economy might be able to bear.

The Finance Ministry said an investor committee representing about 20 percent of the bonds had proposed cuts of just over 22 percent, but the International Monetary Fund said this would fail to meet key debt targets.

“Strong militaries must be supported by strong economies in order to win wars,” said Sergei Marchenko, Ukrainian Finance Minister. “As we approach the deadline, we must urge our bondholders to continue productive, good-faith negotiations, with further debt relief” that can achieve IMF targets.

The bondholders' committee said on Monday it was “committed to working with Ukraine to structure a transaction that may attract the required support from market participants.”

But it warned that Ukraine's proposed austerity “significantly exceeds market expectations” and “would risk significant damage to Ukraine's investor base in the future.”

Ukraine is looking for just over $5 billion in debt relief from bondholders next year alone, as it expects to run a budget deficit of about $43 billion to finance the war. This will be partly guaranteed by $5.4 billion in additional IMF loans and more than $28 billion in other official support.

The Finance Ministry said on Monday that official creditors — a group that includes the United States, the United Kingdom, Japan and other governments that have provided financial support to Ukraine — told bondholders they should receive only “token” payments until 2027.

As an alternative to legacy debt, Ukraine has proposed a mix of bonds that would pay nominal interest until 2027 — initially 1 percent before rising to 3 percent — and securities that would pay more if Ukraine exceeds its tax revenue targets next year. Two years.

If these securities perform, they could reduce losses borne by bondholders to about a quarter over time, the Ukrainian Finance Ministry said.

However, the creditors' committee has proposed debt that pays at least 7.25 percent in the next few years, as well as “recovery bonds” that initially pay low coupons before increasing them if the economy outperforms expectations.

Marchenko said talks would continue and “we are confident that a satisfactory restructuring agreement can be reached in the coming weeks and before the current payment freeze period expires.”