Ukraine bondholders unlikely to approve debt deal with Russia

Ukraine bondholders unlikely to approve debt deal with Russia

LONDON (Reuters) - Ukraine's private creditors who recently agreed to restructure the country's debt are unlikely to allow Kiev to accept Russia's current proposal for repayment of a $3 billion bond, a source said on Tuesday.

The obstacles already facing the surprise offer suggest that the proposal, announced by President Vladimir Putin at the G20 summit on Monday, was made at short notice without much technical preparation and may have been motivated by political or public relations considerations.

Under the plan, Russia would accept an annual debt repayment of $1 billion over three years if the West provided guarantees.

Russia had been refusing to restructure the $3 billion Eurobond on Ukraine's terms, saying the debt could not be considered commercial, and had threatened to take Ukraine to court if it failed to repay the bond in full next month.

Russia's Deputy Finance Minister Sergei Storchak described Moscow's new proposal as rational and "in no way" part of any rapprochment or political deal with the West.

But a financial source in Moscow described the plan as "poorly thought out". "Putin is demonstrating a step towards compromise, but nobody got to the bottom of the technicalities," he said.

The offer should be seen as part of attempts by Putin to mend relations with the West which have been severely strained by the Ukraine conflict, the source added.

"First of all, Putin wants a softening of relations ... including for the creation of a united front against Islamic State," he said.

"On these terms (offered by Russia) a restructuring is impossible, but further steps towards compromise are possible."


The biggest problem, he and other sources said, was that the proposal would leave Russia better off than private bondholders who have agreed to write off part of Ukraine's debt to them under the restructuring deal.

It does nothing to bridge the fundamental gap between the position of Russia, which insists it should be treated differently, and Ukraine, which says it is obliged to treat all its bondholders the same.

Private creditors agreed to a 20 percent "haircut" and a four-year maturity extension to cut Ukraine's debt burden, under a restructuring called for by the International Monetary Fund.

A source familiar with the creditors' thinking said the terms being offered by Russia were very different from those accepted by the swap participants.

"Absent a haircut, this would not appear to be comparable (in net present value terms) to the terms agreed by private creditors. Moreover, it would compromise the main IMF-dictated parameters of the debt operation in terms of front-loaded financing and liquidity provision," the source told Reuters.

"As such, for as long as it remains classified as commercial (not official) debt, the private sector would be unlikely to sign it off," the source added, requesting anonymity.

Russia argues the 2013 two-year bond should be classified as "Paris Club" official debt while Ukraine says it should be treated as commercial debt. The source said reclassification as "official" debt would "change things".

"Then it's the IMF's issue – it effectively becomes Paris Club debt," the person added.

A spokesman for Ukraine's creditor committee declined comment.

But Andrew Wilkinson, a partner at Weil Gotshal and Manges, the law firm which advised the ad hoc creditor committee, said that the restructuring agreement didn't envisage any separate treatment for official debt unless other bondholders consented.

"If Ukraine wants to settle with Russia on better terms (than what others received) they will have to come back to the bondholders for consent," he said.

"Under terms of the deal there is no carve-out for sovereign debt or Paris Club debt."

The IMF said on Monday that it regarded the Russian offer as a "positive step", but the details would have to be worked between Russia and Ukraine.

Ukraine's finance ministry has said that it has yet to receive any official offer from Russia, declining further comment.

(Additional reporting by Lidia Kelly, Natalia Zinets, Denis Dyomkin and Alessandra Prentice, writing by Sujata Rao and Jason Bush,; editing by Marc Jones and Richard Balmforth)