How Ukraine completed a wartime debt restructuring By Reuters

By Marc Jones and Karin Strohecker

LONDON (Reuters) – Just months after Russia invaded Ukraine, the country’s financial adviser Rothschild & Co handed Kiev’s debt chief a thick, black dossier detailing major sovereign debt restructurings over the past 30 years .

For Yuriy Butsa, 40, it would prove essential reading. He had not been involved in the debt relief demanded by Ukraine in 2015 after Russia annexed Crimea, and it was not long before he would have to rely on restructuring expertise.

Faced with an economy crippled by the cost and destruction of war, Ukraine has agreed with creditors to freeze payments on its bonds until August 2022. With no end to the conflict in sight, last week the nation sealed one of the fastest – and largest – debt restructurings in history.

Eclipsed in scale only by Argentina and Greece, the restructuring of more than $20 billion in debt will save Kiev $11.4 billion over the next three years — crucial to both its ongoing war effort and its Fund program International Monetary.

“A stable situation in which there are no more question marks can only benefit Ukraine,” Arvid Tuerkner, director general for Ukraine and Moldova at the European Bank for Reconstruction and Development, one of Kyiv’s major multilateral partners, told Reuters.

This account of how Ukraine’s deal with bondholders ended is based on interviews with five sources from both the government and investors who were involved in the talks and agreed to speak to Reuters on condition of anonymity.

REVIVAL DISCOVERIES

Initial negotiations between the government and its creditors had not gone according to plan.

The talks in June broke down after weeks of the bondholders’ core committee complaining that the write-down Ukraine was asking for was “significantly above the 20% most expected and risked causing “substantial damage ” relationships.

With less than two months until the payment moratorium expires in August 2022, Rothschild held face-to-face meetings at the company’s posh Paris offices on busy Avenue de Messine.

Rothschild declined to comment. The IMF did not immediately respond to a request for comment when asked while on vacation in the US.

Early on July 16, representatives of some of the world’s leading asset management firms and their legal and financial advisors arrived in Paris, where they joined Butsa, Ukraine’s long-term legal advisors White & Case and the Rothschild team.

A series of meeting rooms, adorned with images of the famous Rothschild vineyards, had been reserved to allow for joint discussions and private strategizing.

The mood was pragmatic from the start, sources from both the government and lenders said. Everyone had come hoping to make a deal – even if both sides were still far away.

EXCEPTIONAL UNCERTAINTY

There was reason to go back to the talks.

In addition to the deadline, the IMF, providing Ukraine with support of $ 15.6 billion, has just updated its forecasts. They had reflected a worsening economic picture, but still provided a new basis to work from.

Ukraine started by presenting its proposal. Members of a key group of bondholders representing some of the world’s biggest asset managers, such as BlackRock (NYSE: ) and Amundi, were also able to spell out their demands: that Ukraine immediately restart “coupon” payments , provide a path to higher principal recovery and, importantly, ‘keep it simple’.

IMF experts were on call in both Kiev and Washington in an exceptional arrangement, according to a source. This was essential for the labor-intensive modeling required to determine what each proposed trade-off would mean for Ukraine’s long-term debt sustainability.

By 4am on July 18 in Paris or 5am in Kyiv and almost 48 hours after the trial began, another request was made to the IMF teams to rerun the numbers. Some of those collecting the figures had barely slept.

The Fund’s help was invaluable, its staff worked at breakneck speed and helped to overcome several obstacles.

Talks over how to tap Russia’s frozen assets and confusion over a new IMF policy designed to try to help it adjust to the realities of an ongoing war meant talks could not begin at the IMF’s spring meetings in April, as hoped, and they were still causing trouble.

Butsa’s team and the IMF were also adamant that there could be nothing like the costly “GDP mandates” used to sweeten the 2015 restructuring. On their terms, Kiev must increase much of its economic output if nominal GDP exceeds $125.4 billion and annual growth reaches 3%.

But Ukraine offered an alternative in the form of a simpler GDP-linked bond, and lenders were also given the instant coupon payments they wanted, starting at 1.75% and eventually rising to 7, 75%

Structured to be eligible for the main bond indices and therefore easier to buy and sell, it meant that the gap between the parties was as good as it was narrow. With only the fine print to complete, Parisians stepped out as the packed city put the finishing touches on preparations for the Olympics.

Car accident

The drama is not quite over, however.

Returning from the Polish airport where his flight had landed – the safest route since the Russian invasion halted flights from Kiev – a driver flipped the VW Golf of Ukraine’s debt chief Butsa.

No one was hurt, but Butsa now sat in an insurance office in Lviv, filling out forms while taking calls to finalize the statement that the $20 billion restructuring had been agreed in principle.

The final resounding result from the bondholder vote was over 97% support.