Ukraine’s restructuring of its GDP warrants fell through due to investor doubts

Ukraine has failed to reach an agreement with investors on restructuring $2.6 billion of debt that depends on the country’s future economic growth.

This was reported by the Financial Times, citing Ukraine’s Ministry of Finance.

According to the outlet, the main reason is investors’ uncertainty about when the war will end and about Ukraine’s economic prospects.

The issue concerns so-called warrants that Ukraine issued ten years ago after the annexation of Crimea. At that time, the country was already restructuring its debts, and these securities were part of the deal. Last year they were temporarily excluded from new talks due to the complexity of their terms, but now, to comply with the IMF program, Kyiv still needs to reach an agreement with the holders of the warrants.

The Financial Times emphasizes that IMF support also depends on whether the EU agrees to provide Ukraine with €140 billion in loans secured by income from frozen Russian assets.

During the current negotiations, Kyiv offered investors to exchange the warrants for cash or bonds, but no agreement was reached. The committee of the largest holders of the instruments—including hedge funds VR Capital and Aurelius Capital—demanded additional guarantees, fearing that as the war drags on Ukraine might again ask creditors to write off part of its debts, as happened last year with the $20 billion debt.

Note that the warrants are securities tied to the rate of economic growth. Ukraine’s Finance Ministry introduced them in 2015 under Minister Natalie Jaresko. In essence, they are a tax on economic growth that the country must pay to creditors.

As a reminder, in May Ukraine announced it would miss a $665 million payment on GDP-linked sovereign debt after unsuccessful talks on restructuring with a group of creditors led by hedge funds.