How Ukraine Achieved Wartime Debt Restructuring

By Marc Jones and Karin Strohecker

LONDON – Shortly after Russia’s invasion of Ukraine, Rothschild & Co provided Kyiv’s debt chief, Yuriy Butsa, with an extensive summary of significant sovereign debt restructurings from the past three decades—a crucial resource for him, given his lack of experience with Ukraine’s earlier debt negotiations following Russia’s annexation of Crimea in 2015.

By August 2022, as Ukraine faced an economy severely damaged by the ongoing war, the country opted to halt payments on its bonds. Recently, it successfully concluded one of the swiftest and largest debt restructurings in history, affecting over $20 billion and ultimately saving Kyiv $11.4 billion over the next three years. This outcome is vital for sustaining its war efforts and fulfilling its commitments to the International Monetary Fund (IMF).

"A stable situation with fewer uncertainties will only benefit Ukraine," noted Arvid Tuerkner, managing director for Ukraine and Moldova at the European Bank for Reconstruction and Development, a significant multilateral partner to Kyiv.

This narrative of Ukraine’s negotiations with bondholders is informed by interviews with five sources from both the government and investment communities who participated in the discussions and chose to remain anonymous.

RESUMING NEGOTIATIONS

Initial talks between the Ukrainian government and its lenders faltered. In June, negotiations collapsed when bondholders indicated that the proposed debt writedown exceeded expectations, which risked damaging relationships significantly.

With the August payment moratorium deadline approaching, Rothschild facilitated in-person meetings at their Paris headquarters. On July 16, representatives from major asset management firms, along with Butsa and his legal advisers, convened to discuss the situation. The atmosphere was pragmatic, as both sides entered with the intent to reach an agreement despite notable gaps between their positions.

UNCERTAINTY LOOMS

The urgency of resuming talks was amplified by the impending deadline. The IMF had recently provided Ukraine with a $15.6 billion support package, updating its economic projections, which, though pessimistic, provided a new foundation for discussions.

Ukraine presented its proposal early in the talks. Key bondholder representatives from firms like BlackRock and Amundi articulated their demands, emphasizing the need to restart coupon payments immediately and to simplify the recovery process.

While the IMF and Rothschild declined to comment, sources revealed that IMF experts were readily available during the negotiations, providing critical assistance in evaluating the implications of proposed compromises for Ukraine’s long-term debt sustainability.

As discussions progressed, requests for recalculations became frequent, with the Fund’s staff working tirelessly to navigate challenges stemming from political decisions, including tapping into frozen Russian assets.

Butsa’s team aimed to avoid the costly "GDP warrants" from the previous restructuring, instead offering a simpler GDP-linked bond along with the immediate coupon payments that creditors desired, starting at 1.75% and potentially rising to 7.75%. This new structure was designed to ensure eligibility for major bond indexes, effectively bridging the divide between the parties.

FINALIZING THE DEAL

Despite some drama, as Butsa was involved in a minor car accident while returning from the airport, he managed to remain focused on finalizing the debt restructuring agreement. Sitting in an insurance office in Lviv to handle the aftermath, he continued to communicate with stakeholders to confirm that the $20 billion restructuring had been agreed upon in principle.

The vote among bondholders achieved a remarkable majority, with over 97% in support of the deal.