Ukraine Short on Time for Debt Deal as Real Deadline Is August

Ukraine and its creditors have even less time than it appears.

While Sept. 23 is the date the first Ukrainian Eurobond comes due, a restructuring agreement will need to be reached at least five to six weeks before that to allow time for the creditor group to convince other bondholders to accept the terms, make amendments and complete the eventual bond exchange, according to Exotix Partners LLP and Raiffeisen Bank International AG. Even after a 10-day grace period has been factored in for the $500 million principal payment, the real deadline for a deal is probably the middle of August, they said.

If an accord isn’t passed on time, Ukraine may be forced to impose a freeze on debt payments, opening the door to legal action from bondholders that include Russia, owner of a $3 billion note that it says must be repaid in December. A deal probably also needs to be in place before the International Monetary Fund releases the third part of a $17.5 billion loan.

“There are a number of risks to the implementation phase,” Jakob Christensen, an analyst at Exotix Partners, said by e-mail on Wednesday. “The offer may be turned down at the bondholder meeting requiring further votes, there may be holdouts and even fleshing out a proposal in detail may take time,” he said.

Ukraine and a four-member creditor group led by Franklin Templeton only agreed to direct negotiations on July 1 after a two-month standoff over the need for a writedown to the face value of about $19 billion of Eurobonds.

Optimism Rally

The chances of an imminent deal seemed less likely on Wednesday after IMF Managing Director Christine Lagarde said talks had been “difficult” and urged creditors to be “sensible.”

Yet bond investors are optimistic. The nation’s $2.6 billion of notes due July 2017 rallied 7.8 cents in July, on course for the best monthly performance since May 2014, on expectations that a deal will get done in time.

Ukraine sent new proposals about a week ago and is awaiting a response from bondholders, Finance Minister Natalie Jaresko said in Kiev on Monday. The latest offer is “market-orientated” and “fair,” Prime Minister Arseniy Yatsenyuk said at the same meeting.

The creditor group hasn’t made any public statements so far that would suggest it has changed its view, first argued in April, that the IMF’s three restructuring targets could be met with lower interest payments and longer repayments dates. A counter-offer from Ukraine last month called for a so-called haircut of 40 percent of principal, according to a person familiar with the proposal.

21 Days

European-style bonds typically demand a 21 day consent-solicitation period and a further two weeks if the first bondholder meeting is adjourned and a second required, according to Jonathan Melton, a partner at Allen & Overy in London. It usually takes lawyers about two weeks to put together documents before the process begins, he said.

So long as a deal has been agreed by the time the Sept. 23 bond is due, the length of the implementation process needn’t be a problem, according to Christoph Trebesch, a professor at the University of Munich.

The average time needed for an agreement to be turned into a settlement is three months, according to data on 17 sovereign debt restructuring between 1998 and 2010 compiled by Trebesch. The complete restructuring process took an average of 19 months, he found. If the bond exchange is completed by September, Ukraine will have taken just eight months from when the restructuring was announced at the end of January.

Technical Default

“If it’s part of a settlement process then missing one or two payments is not the end of the world,” Trebesch said by phone Tuesday. “It’s actually quite common to see a technical default in the final phase of a debt renegotiation. The missed payments are then fully paid once the deal is done and settlement occurs.”

Ukraine could also seek a maturity extension on the September 2015 debt to give it more time to complete the process. In April, state-run lender Ukreximbank got creditors to agree to push back the due date on its 2015 note by three months to give it time to usher through a bond exchange.

It only secured the necessary amount of votes at the second time of asking once bondholders were convinced that the final deal they would receive was a favorable one — something the sovereign is less likely to promise.

“Ideally speaking, with a breakthrough in the talks within the next few days or weeks, there will remain sufficient time to implement an agreement,” Gunter Deuber, the head of research at Raiffeisen Bank International AG in Vienna, said by phone Monday. “Otherwise the risk of a moratorium remains.”

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