Fixed Income

June 15, 2015

Ukrainian sovereigns lost ground despite a strong start last week, after Finance Minister Natalia Jaresko again pointedly told bondholders that the government will stop making coupon payments if restructuring talks don’t make progress. Bloomberg News reported that Jaresko informed creditors that MinFin is seeking a 40% principal writedown to meet the objectives which the IMF has set for the restructuring. The IMF, meanwhile, indicated that it could keep funding Ukraine even in the event of a debt-servicing moratorium by Kyiv. There has been 3-month impasse in negotiations between the government and a creditor group led by Franklin Templeton, but the Ukrainian side now looks to have the upper hand thanks to Western and IMF support. We estimate that in case of a 40% haircut and 7-year maturity extension for the Ukrainian 9.25% Eurobonds due in July 2017, the effective yield would be 13.6%, taking into account their current price of 48 cents on the dollar.