UKRAINE (Represented by the Minister of Finance of Ukraine acting upon instructions of the Cabinet of Ministers of Ukraine)

UKRAINE
(Represented by the Minister of Finance of Ukraine acting upon instructions of the 
Cabinet of Ministers of Ukraine)
U.S.$1,984,838,000 5.00 per cent. Notes due 2015
(to be consolidated and form a single series with the U.S.$3,000,000,000 5.00 per cent. Notes due 2015 issued on 24 December 2013)
Issue price: 100 per cent. plus accrued interest from 24 December 2013
The U.S.$1,984,838,000 5.00 per cent. Notes due 2015 (the “New Notes”) to be issued by Ukraine, represented by the Minister of Finance of Ukraine acting upon
instructions of the Cabinet of Ministers of Ukraine (the “Issuer” or “Ukraine”), will mature on 20 December 2015 and will be redeemed at par at that date. The New Notes
will be consolidated and form a single series with the U.S.$3,000,000,000 5.00 per cent. Notes due 2015 issued on 24 December 2013 (the “Original Notes” and, together
with the New Notes, the “Notes”).
Interest will accrue on the outstanding principal amount of the New Notes from and including 24 December 2013, and will be payable semi annually in arrear on 20 June and
20 December in each year, commencing on 20 June 2014. Accordingly, there will be a short first coupon (see Condition 4 of the “Terms and Conditions of the Notes”). The
New Notes will bear interest at a rate of 5.00 per cent. per annum.
SEE “RISK FACTORS” FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW
NOTES ON PAGES 1 to 24.
The New Notes have not been and will not be registered under the United States Securities Act of 1933, as amended (the “Securities Act”), or with any securities regulatory
authority of any State or other jurisdiction of the United States, and may not be offered or sold within the United States except pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities Act. For a summary of certain restrictions on resale, see “Subscription and Sale” and “Form of Notes
and Transfer Restrictions”.
The New Notes are expected to be rated CCC+ by Standard & Poor’s Credit Market Services Europe Limited (“Standard & Poor’s”) and CCC by Fitch Ratings Ltd.
(“Fitch”). Standard & Poor’s, Fitch and Moody’s Deutschland GmbH (“Moody’s, and, together, with Standard & Poor’s and Fitch, the “Rating Agencies”) have also issued
ratings in respect of the Issuer as set out in this Prospectus. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or
withdrawal at any time by the assigning rating organisation. As of the date of this Prospectus, Standard & Poor’s, Fitch and Moody’s are rating agencies established in the
EEA and registered under Regulation (EC) No 1060/2009, as amended (the “CRA Regulation”).
In general, European regulated investors are restricted from using a rating for regulatory purposes if such rating is not issu.....

http://www.centralbank.ie/regulation/securities-markets/prospectus/Lists/ProspectusDocuments/Attachments/19034/Prospectus%20-%20Standalone%20(3).pdf

Guest post: Mr Putin’s clever bond issue

Guest writer | Mar 10 10:30 | 20 comments | Share

What to do when your creditor invades? Beyond its occupation of Crimea, Russia remains a lender to Ukraine — even as IMF teams ponder the Kiev government’s financial sustainability. Mitu Gulati, a law professor at Duke University, considers both sovereigns’ options.

________________

In December 2013, Russia lent Ukraine $3bn as the first part of a $15bn assistance package. At the time, few paid attention to either the form that the lending took (a Eurobond) or to a small contractual innovation in the bond issue. Things have changed.

The Yanukovich government is gone, Crimea is trying to secede with the help of the Russians, and Ukraine is on the brink of defaulting on its debt payments unless a substantial EU bailout package is forthcoming. It is in this context that the new contract term and the form of the Russian lending might be important.

Having cut ties with Russia, Ukraine needs a substantial debt relief package from the EU and is likely to receive it (along with some IMF assistance). The question though is how much of that relief will come from an EU taxpayer bailout and how much will come from haircuts to the claims of private creditors. The answer to the question will depend, as it always does, on who the creditors are. The more unpalatable the creditors, the less willing taxpayers are going to be to subsidise them.

In this case, thanks to that new contractual provision that was placed in the bond in December 2013, Russian President Vladimir Putin is likely to have a big claim coming due soon.

The provision in the bond contract, 4(b), titled, “Debt Ratio” reads:

So long as the Notes remain outstanding the Issuer shall ensure that the volume of the total state debt and state guaranteed debt should not at any time exceed an amount equal to 60 per cent of the annual nominal gross domestic product of Ukraine.

For a sovereign bond, this is an unusual provision. As part of my research, I have been reading sovereign bond contracts for years and have never seen one of these. That is, where the creditor is essentially allowed to declare his debt due and payable immediately if the 60 per cent ratio of debt to GDP is crossed. Understanding how this provision is likely to play out might tell us why Mr Putin may have demanded this provision a few months ago.

When Russia lent Ukraine the $3bn in December, the debt-to-GDP ratio, as reported by the Ukraine Ministry of Finance, was just north of 40 per cent. Sixty percent was a long way away. But if one factors in the loss of Crimea, the inevitable economic consequences of the unrest throughout the country and — lest we forget — the inevitable drop in GDP that follows IMF-prescribed austerity, that ratio is probably going to clear the 60 per cent threshold. And when it does, Mr. Putin can declare the entire $3bn due and payable immediately. Put differently, the Russian loan that, on its face, had a duration of two years is, thanks to the combination of the Debt Ratio covenant and Russian activities in Crimea, effectively a demand note (subject to the typical 30 day grace period).

At this point, anyone familiar with the world of sovereign debt restructurings will likely ask two questions.

(1) So what if Russia has a contractual right to accelerate? Russia is not an ordinary commercial creditor. It is a member of the Paris Club; the exclusive club of rich creditor countries that gets together periodically in Paris to renegotiate debts that its members have with distressed debtor nations. Surely, as a member of the Paris Club, the rules that will govern Russia’s debt renegotiation with Ukraine will be those of the Paris Club rather than those of the contract (including acceleration provisions).

(2) In any event, doesn’t Ukraine have a defence that these are Odious Debts and, therefore, void under international law? After all, this is a case of a lender (Russia) who surely knew (or should have known) that the regime it was lending to could have been systematically looting the funds coming in from the borrowing.

Both are good questions. And the answer to both may well be yes. But this is where Mr Putin’s clever structuring of the December 2013 lending as a tradable and liquid Eurobond, as opposed to the typical illiquid country-to-country Paris Club lending, comes into play.

If Mr Putin senses that the Ukraine is planning to skip out on payments to him, all he needs to do is to quietly sell his bonds to some private enterprise that can then plead complete innocence regarding any kleptomaniacal tendencies of the prior Ukrainian regime. Indeed, he may not even need to sell the bonds; warehousing them with a Russian bank will probably be enough. The success that holdout creditors have had with English law governed bonds (the same law of the Ukrainian December 2013 issue) in the 2012 Greek restructuring might produce a large set of willing and eager secondary market purchasers for these bonds.

Game, set and match to Uncle Vlad?

Perhaps not. He may have been clever in his structuring of the lending in Eurobond form and in the insertion of the Debt Ratio covenant. But the Ukrainians, should they choose to, can be equally clever. All they need to do is read a few provisions down from 4(b) and they will find, in 6(b), the Payments provision, a potent weapon with which to counter Mr. Putin. This is essentially the same provision that Cyprus had in its foreign-law bonds, which it could have used in order to restructure them last year. They ultimately chose to use bailout funds to pay their private creditors in full and on time. Ukraine may not do the same. Suffice it to say, things are going to play out in an interesting fashion.

Related links:
Ukraine $1,984,838,000 5.00 per cent Notes due 2015 — and the burning tyres therein – FT Alphaville
So long, Ukraine $1,984,838,000 5.00 per cent Notes due 2015 – FT Alphaville

This entry was posted by Guest writer on Monday March 10th, 2014 10:30. Tagged with Debt Restructuring, Russia, Sovereign Debt, Ukraine.

Ukraine $1,984,838,000 5.00 per cent Notes due 2015 — and the burning tyres therein

Joseph Cotterill Author alerts | Feb 19 17:50 | 9 comments | Share

Moscow doesn’t send tanks into revolting former vassals any more. It sends dollars.

For anyone who decides to follow the money when it comes to Ukraine’s split between the EU and Russia, the consequences can sometimes be grimly surreal when it gets to the prosaic matters of bond finance.

Take events this week. Even as Kyiv burned on Tuesday, Viktor Yanukovich’s government had already found the time to file with the Irish Stock Exchange for a $2bn increase in a $3bn, two-year Eurobond which it first issued late in December.

Don’t bother trying to buy some of that $2bn. The mere 5 per cent coupon should have already told you something is artificial here. The new notes are supposed to go straight to Russia, as part of a $15bn bailout the Kremlin is drip-feeding like so much water torture. Pretty much right as we went to pixels on this post, Reuters was reporting that Russia’s purchase might be delayed for “technical” reasons. Hmm. Still, if the purchase and the broader package remained on track, Ukraine’s sovereign debt bill would be paid this year, but would be $15bn the year after.

As the WSJ has already pointed out, this fact adds new boilerplate language to the Eurobond’s latest prospectus, possibly the most ironic ever to grace the risk factor section of a sovereign bond (given the bond’s buyer):

Given the size of this external financing requirement in 2015, there is a significant risk that funds available in the domestic and international capital markets will be insufficient to cover this requirement in full, andtherefore Ukraine’s ability to refinance or repay this debt will in large measure be dependent on relations with Russia at the time and Russia’s willingness to refinance the debt as it matures. There can be no assurance that Russia will be willing to refinance such maturing debt on similar terms or at all, and in the absence of such refinancing (unless financing is then available to Ukraine in the domestic or international capital markets and/or an IMF or other programme of official support has been negotiated by Ukraine in the meantime) there is a risk that Ukraine may be unable to meet its external debt obligations.

Though readers in the Kremlin are also told “Accession to the EU is a long term strategic goal of the Government”!

But there is a broader point here.

Russia is effectively becoming a major official creditor of Ukraine — or this Ukrainian government, anyway. What happens to the debt if the opposition takes charge? Good question, we think. But the Russian government must be confident that this will not happen, because it is buying bog-standard Eurobonds. Not, say, making an official loan which could carry more bespoke terms, including on seniority vis-a-vis other creditors.

Which means we have another boilerplate pari passu clause to look at! An especially surreal one:

The Notes constitute direct, unconditional and, subject to the provisions of Condition 3 (Negative Pledge), unsecured obligations of the Issuer and (subject as aforesaid) rank pari passu without any preference among themselves. The payment obligations of the Issuer under the Notes shall rank at least pari passu with all other unsecured and unsubordinated obligations of the Issuer, present and future, save only for such obligations as may be preferred by mandatory provisions of applicable law.

Especially surreal, because especially useless to any (normal) creditor. All that a future Ukrainian government would need to subordinate the owner of this technically English-law bond is a stroke of the legislator’s pen — changing its own laws to prefer somebody else.

After all, in its own interminable saga, Argentina of course has just filed a petition to the United States Supreme Court about an allegedly over-mighty pari passu clause which prevented similar operations using domestic legislation.

This loophole isn’t just in the pari passu clause of the Ukrainian bond. Let’s look at the negative pledge:

So long as any Note remains outstanding (as defined in the Trust Deed), the Issuer will not grant or permit to be outstanding, and it will procure that there is not granted or permitted to be outstanding, any Security Interest (other than a Permitted Security Interest) over any of its present or future assets or revenues or any part thereof, to secure any Relevant Indebtedness of Ukraine unless Ukraine shall (i) before or at the same time procure that the Issuer’s obligations under the Notes are secured equally and rateably therewith to the satisfaction of the Trustee or (ii) promptly thereafter ensure that the Issuer’s obligations under the Notes have the benefit of such other security as shall be approved by the Trustee in its absolute discretion or by an Extraordinary Resolution (as defined in the Trust Deed) of the Noteholders, being not materially less beneficial to the interests of the Noteholders.

How reassuringly verbose. But note the definition of permitted lien:

“Permitted Security Interest” means: (i) any Security Interest arising by operation of law which has not been foreclosed or otherwise enforced against the assets to which it applies; or…

Next, found among the seemingly dull technical language on carrying out payments of the bonds:

(b) Payments subject to fiscal laws

All payments in respect of the Notes are subject in all cases to any applicable fiscal or other laws and regulations…

Which, again, would be an inviting target for an enterprising Ukrainian legislator. It was after all suggested before Cyprus’s debt crisis that the Nicosia government should use similarly ropey payments provisions in its foreign-law bonds to force a restructuring deal on holdouts. This didn’t happen, of course, but the language is there.

We could go on — it’s also worth carefully reading the waiver of sovereign immunity with respect to court enforcement of judgments after default. Still, the point is made. Russia must be very confident of its position. (Update: Obviously if “technicalities” don’t get in the way…) As the international community works to stop the violence and seek an exit from the crisis, we wonder about that.

One more thing meanwhile. These contractual provisions are more or less the same in other bonds of Ukraine, which are very much in private hands. Any bondholder must doubtless count on English-law protection of their claims, to back up an implicit bet that the country will pull through its crisis and avoid default. Given the prices of several such bonds plummeted to fresh lows on Wednesday, this would be a profitable bet if it pays off. And if investors have read their bond contracts…

Related links:
Yanukovych’s gamble and Kiev’s burning – In Moscow’s Shadows
Ukraine’s promise of peace overtaken by fresh tragedy – Timothy Snyder, FT
“Vladimir Putin’s worst nightmare” – New Republic

This entry was posted by Joseph Cotterill on Wednesday February 19th, 2014 17:50. Tagged with Bonds, Russia, Sovereign Debt, Ukraine.

Ukraine, war, and sovereign default

Ukraine, war, and sovereign default

Joseph Cotterill Author alerts | Aug 15 17:46 | 4 comments | Share

Ukraine claimed at pixel time to have fired on a number of Russian tanks crossing its borders.

Being invaded by Russia is not very conducive to a country’s GDP. But also, bizarre as it seems if its armour really is aflame in the Donbas, Russia is also the owner of Ukrainian sovereign debt. This has some precarious terms (for the borrower) restricting growth in debt to GDP to below 60 per cent.

Which is why it is worth noting this chart on Friday from Gabriel Sterne of Oxford Economics…

Ukraine also has a $17bn two-year programme from the IMF, as of May. Back then the IMF staff judged that the sovereign debt-to-GDP ratio would go from 45 per cent this year to 60 per cent in four years’ time (that is, after Russia’s bond matures).

But as Sterne points out, these forecasts would have gone well out of date already. One thing which we’d note, for example, is that the hryvnia has fallen to 13 against the US dollar. That’s a danger level noted by the IMF’s staff in another report:

Staff analysis suggests that an exchange rate in the UAH 10–13/US$1 range is consistent with Ukraine’s fundamentals over the medium term, with the rapid economic shifts underway accounting for the uncertainty in these estimates. Should the hryvnia trade within the UAH 10–11/US$1 range, the impact would be manageable for banks, firms, and households;balance sheets would take a stronger hit if the exchange rate settled in the UAH 12–13/US$1 range…

In other words, one threat to Ukraine’s debt — that banks will have to be bailed out of FX exposures — is growing.

That’s before factoring in the economic destruction of conflict in the east, as Sterne attempts to do (though still without fully taking into account a potential Russian invasion). But in any case the IMF programme seems to be heading markedly off the reservation.

Of course, the IMF didn’t like it when this happened in Greece in 2010, when its loans were mostly used to make payments to private bondholders. They could thus cash out of a sinking sovereign while official lenders took the exposure instead, storing up greater losses for remaining bondholders in future (and risking financial contagion). Ultimately it took one of the biggest, and most overdue, sovereign debt restructurings in history to correct the official sector’s mistakes.

The IMF has since entertained restructuring-lite options to use on dodgy sovereigns, before they get as bad as Greece. These would in theory follow set rules, though they’d more likely be ad hoc.

We wonder if Ukraine is going to be an ad hoc case, in which bondholders are ‘invited’ to accept less than full repayment (or to maintain exposure through a maturity extension) while the IMF programme is still young.

Sterne also wonders this — although there’s a catch:

The main argument against default may be that there is no bond for which – on its own — default would appear worth the triggering the costs of default. There is a huge political economy aspect to this potential default. Default costs are big and there is not much point in defaulting unless there is a clearly unaffordable amortisation payment encroaching. So in spite of the arguments for default being strong in general; the IMF would need to take a view on a bond-by-bond basis, as and when they mature. In Greece, for example, it was the March 2012 €12bn Eurobond that proved too big to pay.

Relatively few bonds are maturing this year or next. One of them is Russia’s $3bn claim. As we’ve noted with the curious debt-to-GDP clause in that bond, Russia effectively can accelerate and demand full payment any time — potentially triggering cross-default provisions in other bonds — rather than negotiate a restructuring.Update: However, this paper by Anna Gelpern for the Peterson Institute is worth reading for one way of removing the leverage Russia has here.

But if the IMF does decide not to recommend early debt restructuring (and/or to avoid antagonising Russia), the Greece syndrome may come back, as Sterne also notes:

Default-dodging is good for holders of those bonds but not for other holders of Ukrainian assets. If default is avoided in the short-term, it means holders of other assets are taking on more of the risk. The funds for paying out the maturing bonds are coming from IMF programme money. And since the IMF must always be paid back, longer term bondholders are ultimately taking on a greater share of the risk. This is because to achieve a given level of debt reduction, the proportionate haircut will eventually need to be bigger, the more the non haircuttable IMF debt is used to bail out haircuttable…

Whatever the IMF decides — Ukraine is going to be a test of whether anything has changed in sovereign debt restructuring.

http://ftalphaville.ft.com/2014/08/15/1931902/ukraine-war-and-sovereign-default/?ftcamp=crm/email/follow/author/Q0ItMDAwMDkxNg==-QXV0aG9ycw==/product

Related links:
The eurobond Ukraine didn’t issue to Russia - FT Alphaville (February)
War for ‘New Russia’ drives separatists – FT

This entry was posted by Joseph Cotterill on Friday August 15th, 2014 17:46. Tagged withIMF, Russia, Sovereign Debt, Ukraine.