There will be no default: Ukraine has reached an agreement with creditors, Eurobonds have risen sharply. All the details

Ukraine has reached an agreement in principle with its creditors to restructure its $20 billion public debt by 2029. This means that there will be no default – neither technical nor full-fledged – in Ukraine in August. And billions of dollars will be saved in the coming years. Experts say that such a deal will not only free up funds for Ukraine's urgent needs but also improve its reputation as a borrower.

Thus, on July 22, the bondholders' committee recognized nominal losses of 37% of its assets on 13 bonds, waiving claims worth $8.67 billion. This was stated in a statement on the terms of the deal.

Against this backdrop, the value of Ukrainian Eurobonds on global exchanges increased by 13-20%. According to closed data from the Bloomberg trading platform provided to the media by ICU Group analyst Mykhailo Demkiv, by 12:00 Kyiv time on July 22

• Euro-denominated bonds maturing in 2028 increased by 17.55% to 32.6% of the face value, in 2032 – by 20.45% to 30.71%;
• USD-denominated bonds maturing in 2024 rose by 14.49% to 36.18%. Those maturing in 2025 increased by 16.96% to 36.67%;
• "long" securities maturing in 2031 and 2035 added the most to their nominal value – 18.88% and 19.77%, respectively.

It is worth noting that when the price of government securities rises, it means that investors consider them less risky and see the point in investing. But when the price falls and bond rates rise, the situation is unfavorable.

Ukraine will save tens of billions of dollars: where will it be spent?

As a result of the agreement, Ukraine expects to save $11.4 billion over the next three years, until 2027, the Ministry of Finance notes. By 2033, the savings will reach $22.75 billion.

The freed-up funds will be used for defense and security, social spending, and recovery needs. "The completion of this restructuring agreement will create conditions for Ukraine's early return to the international capital market when the security situation stabilizes to finance the rapid recovery and reconstruction of our country," said the head of the Ministry, Serhii Marchenko.

According to him, Ukraine now intends to implement the restructuring deal as soon as possible, provided the documentation is ready. Marchenko calls the deal an important step to ensure budgetary stability and preserve Ukraine's financial resources needed to continue financing defense.

"We are restoring debt sustainability. Today we have reached an agreement in principle with the Ukrainian Eurobondholders' Committee. This is an important stage in the debt restructuring process," added Prime Minister of Ukraine Denys Shmyhal.

Restructuring terms: what is known about the deal

Back in August 2022, Ukraine agreed to a two-year deferral of debt service on direct and sovereign-guaranteed Eurobonds. Now, a new agreement has been reached.

Thus, an agreement in principle was reached with the creditors' committee, which includes Amundi SA, BlackRock Inc, and Amia Capital LLP, as well as other investors, who together hold about 25% of the bonds. At least two-thirds of them must approve the deal to finalize the debt restructuring.

The previous payment freeze was due to expire on August 1, 2024, with the coupon payment on the bonds maturing in 2026. Ukraine needed to restructure this debt in accordance with the terms of the IMF program. Both the IMF and the country's bilateral creditors, including the United States and the Paris Club, signed off on Ukraine's proposals to its creditors.

The government and creditors agreed to restructure the claims in two packages - "A bonds" and "B bonds" will be issued. The B bonds will be a future incentive for Eurobond holders, as they will be subject to higher payments if Ukraine's nominal GDP growth in 2028 exceeds the IMF's forecast for that year by 3%. Such a one-time payment on the B package will be made in 2029, with regular repayments on the package scheduled for 2030, 2034, 2035, and 2036.

The coupon payments on the new bonds issued under the A bonds will start in 2025 at 1.75% and reach 7.75%. Payments will start in 2029. In total, the A bonds will have four series maturing in 2029, 2034, 2035, and 2036.

The arrangements are supported by the Committee of Creditors of Ukraine and are in line with the targets of the IMF's Extended Fund Facility program, in particular: (1) debt-to-GDP ratio of 82% by the end of 2028, (2) debt-to-GDP ratio of 65% by the end of 2033, (3) average financing needs of 8% of GDP in 2028-2033.

The Ministry of Finance also planned to include in the agreement a revision of the terms of payment for GDP warrants issued as part of the previous restructuring in 2015. However, so far, no agreement has been reached on the warrants, although the Cabinet of Ministers promises to continue negotiations with their holders.

Also, as Bloomberg notes, the parties agreed to eliminate the so-called cross-default clause between international bonds and warrants maturing in 2041, the payments on which are tied to economic growth. The clause meant that a technical default on one instrument would be transferred to the other.

Not just a postponement: what experts say about restructuring

Experts explain that reaching an agreement in principle with creditors nullifies insinuations about Ukraine's allegedly possible default in August 2024. According to Maria Repko, deputy director of the Center for Economic Strategy (CES), the negotiations were not easy, but eventually, the situation stabilized.

"There will be no default... The agreement in principle is very good because the parties entered the negotiations with quite different expectations. The situation was further complicated by the IMF factor - the government's proposal had to satisfy not only private creditors but also the Fund," Repko explained.

According to her, it is also important that the government agreed not on another deferral of payments, but on debt restructuring. "We have shown the people who once lent us money that we can negotiate sensibly. This is necessary for future investments," the expert summarized.

Danylo Hetmantsev (Servant of the People), chairman of the Verkhovna Rada Committee on Finance, Taxation and Customs Policy, made similar predictions. "I had no doubt that an agreement would be reached. The debt restructuring will free up the necessary resources for defense and social support during the war. The agreement is a prerequisite for ensuring debt sustainability, returning to external commercial capital markets as soon as possible, and maintaining macro-financial stability in general," he said.

As OBOZ.UA reported earlier, the Cabinet of Ministers was granted the right to temporarily suspend payments on the external public debt if necessary. This right was introduced until October 1, 2024, to ensure a smooth process of concluding a debt restructuring agreement.

A similar technical solution was already used in 2015 during the public debt restructuring. Back then, Ukraine adopted the law "On the specifics of transactions with state, state-guaranteed and local debt" in May, reached agreements in principle with investors in late August, and announced the completion of the deal in November.

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