“A time bomb”: The Ministry of Finance has not yet reached an agreement with GDP warrant holders
24 April 17:07
Ukraine held a meeting with members of the Special Committee, which includes institutional investors holding about 30% of Ukraine’s GDP in warrants, but failed to agree on the terms of restructuring payments. This was announced by the Ministry of Finance of Ukraine following negotiations that lasted from April 15 to 23, "Komersant Ukrainian" reports.
The Ministry of Finance explained that the proposal offered to investors was formed in accordance with the parameters of the IMF Program to restore debt sustainability and is consistent with the principle of equal treatment of the Group of Official Creditors of Ukraine.
What proposals did investors receive and how did they respond?
Ukraine offered two options to the holders of the GDP warrants:
1. Exchange of the warrants for an additional issue of Eurobonds issued as part of the restructuring in 2024. Under this option, investors will receive the same set of A and B bonds as the holders of last year’s Eurobonds in the ratio of 1.35 bond units for every 1 unit of warrants.
2. The second option provides for a change in the terms of the GDP warrant issue as follows:
– Payments for 2025-2028 are canceled;
– The option to redeem/cancel the GDP warrants will be extended until May 2029, while the redemption price will increase progressively from 85 cents in 2026 to 100 cents in 2029. The restructured warrants (with payments in 2029-2041) will have the same characteristics as the existing warrants, except for the redemption option;
– The holders will receive 36.6 cents of the A Bonds and B Bonds for every 100 cents of the warrants.
Investors could have chosen any of the proposed options and participation in one of them would have been considered support for the restructuring of the warrant terms.
Instead, the Special Committee, representing holders of more than 30% of the warrants, proposed that Ukraine pay 75% of the payment due in May this year, based on GDP growth in 2023, and issue new 7.75% C bonds worth $209 million due in February 2029. Ukraine rejected this offer.
What to expect next
The Ministry of Finance has stated that it is ready for a constructive dialog with investors and is committed to reaching a mutually beneficial solution. As an example, they recalled the successful negotiations on the restructuring of Eurobonds that took place last summer.
It is important to realize that there is not much time for negotiations with warrant holders, as a payment of more than $500 million is due on May 31, tied to economic growth of 5.3% in 2023. In addition, last year the government imposed a moratorium on payments on government derivatives issued in 2015, the so-called GDP warrants.
To those who have already started talking about the possibility of default, MP Danylo Hetmantsev reminded that last year, before the restructuring of Eurobonds, there was also a lot of speculation about default, but eventually an agreement was reached with investors. The MP admitted that the situation, consequences and perimeter of the deal are different now, but there is still time to conclude the deal before May 31.
What is the peculiarity of the current situation
The terms of the GDP warrants stipulate that any GDP growth of more than 3% per year will mean payments to warrant holders.
And GDP growth of 5.3% in 2023 implies substantial payments on GDP warrants in 2025. Due to the fact that the Ministry of Finance reached an agreement with investors in 2022, the payments in 2025 were halved: 0.5% of GDP instead of 1%. However, the more than $500 million that Ukraine has to pay to investors under the current conditions is a significant amount.
Earlier, Finance Minister Sergiy Marchenko said in an interview with RBC-Ukraine that the Ministry of Finance would like to get rid of government derivatives tied to GDP growth.
“We would like to do this very much. Because this is actually a time bomb,” Sergii Marchenko emphasized.
Today, commenting on the failed negotiations with investors, the official said that GDP warrants were created for an economic reality that no longer exists.
“Ukraine’s moderate GDP growth in 2023 does not indicate economic prosperity – it is only a fragile recovery after a nearly 30% drop caused by Russia’s full-scale war against Ukraine. These tools should not stand in the way of our recovery. Our goal is to find a fair and comprehensive solution to this issue,” the Minister emphasized.
Why did Ukraine get into this “minefield”?
In 2015-2019, Ukraine needed to repay about $15 billion in obligations from previous years. There was not enough money. And then, as LIGA.net reminds us, the Cabinet of Ministers of Arseniy Yatsenyuk and the Ministry of Finance, headed by Natalie Jaresko, went to negotiations with the debt holders.
The discussions were difficult, but in the summer of 2015, the parties agreed on the following option: the creditors wrote off 20% of the debt (about $3.7 billion) and gave the Ministry of Finance a four-year grace period. In return, they received bonds with a higher rate (7.75% instead of 7.22%, but for a smaller amount) and a bonus – GDP warrants for $3.2 billion, under which Ukraine pledged to pay them a percentage of economic growth for 20 years.
The formula for the warrants is quite complicated: at a rate of 3% to 4%, the country pays 15% of each percentage point of GDP growth over 3%, and if growth accelerates to 4% and above, it pays 40% of each additional percentage point. The agreement was activated in 2019, and the first payments were made in 2021.
In 2024, Ukraine started new negotiations on public debt restructuring. on July 22, the Ministry of Finance reported that the creditors’ committee agreed to write off 37% of the current debt on 13 series of sovereign Eurobonds and to postpone the maturity from 2024-2035 to 2029-2036. After all formalities were finalized, Ukraine issued new bonds for a smaller amount.
