International bonds worth US$20.5 billion held by various nations have been restructured by Ukraine in a significant historical agreement.
Ukraine's Debt Restructuring: Navigating Financial Challenges Amid Geopolitical Uncertainty
Ukraine has been making significant strides in managing its debt burden, as evidenced by its recent restructuring efforts. The restructuring terms, endorsed by Ukraine's international partners in the Group of Creditors of Ukraine, are set to provide debt relief not later than the end of the Extended Fund Facility (EFF) programme period in 2027.
In the context of 2023, Ukraine eased currency restrictions, allowing Ukrainian borrowers to repay loans provided by foreign banks with the participation of international financial institutions (IFIs), thereby ensuring full servicing of such loans.
Looking ahead to 2025, Ukraine's dollar bonds saw significant volatility, with a focus on geopolitical risks. The country undertook a substantial $8.67 billion restructuring, writing off 35.75% of the debt for consenting bondholders, providing temporary relief but highlighting ongoing fiscal challenges.
Ukraine's debt restructuring history includes a notable $20.5 billion bond restructuring agreement in the past. However, additional negotiations are needed for economic growth-linked warrants.
The National Bank of Ukraine (NBU) has introduced measures to expand options for businesses, including the conversion of debt into equity and the repatriation of dividends. These changes aim to improve the investment climate and facilitate foreign capital flow into Ukraine.
Key features of recent debt restructurings include principal haircuts, coupon reductions, maturity extensions, and novel features such as the ability to convert debt into equity and expanded options for hedging currency risks. The debt restructuring of Ukraine and Ukravtodor resulted in the exchange of existing bonds for four series of Step Up A bonds and four series of Step Up B bonds.
The terms of the restructuring were confirmed by the IMF staff as compatible with the debt sustainability objectives of Ukraine's $15.6 billion Extended Fund Facility (EFF). The swift and effective coordination between the multilateral sector, the official sector, and the private sector in this restructuring is unprecedented in recent sovereign debt restructurings. The debt restructuring was supported by all major stakeholders, including the IMF, Ukraine's international partners, and more than 97% of holders of Ukraine's and Ukravtodor's existing bonds.
Two series of the Step Up B bonds, due in 2035 and 2036, include a novel feature for upward adjustments to the principal amount, triggered by Ukraine's economy outperforming IMF expectations in 2028. The Step Up A bonds pay an initial interest rate of 1.75% in February 2025, which gradually increases to 7.75% after 2034. Similarly, the Step Up B bonds pay an initial interest rate of 3% starting in August 2027, which also gradually increases to 7.75% after 2034.
This successful debt restructuring demonstrates that the current sovereign debt restructuring architecture is capable of delivering substantial and timely debt relief when the objectives of key stakeholders are aligned and the needs of the distressed sovereign debtor are prioritized. The upward adjustment could permit bondholders to recoup up to 12% of the principal haircut they provided in the restructuring.
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