What do the concepts of "state bank" and "default" have in common?
Ukreximbank started negotiations with creditors sluggishly
Ukrainian debtors are joining forces. State-owned companies and municipal borrowers will restructure their debts with due regard for the Ministry of Finance.
The restructuring of Ukrainian debt is gaining momentum. Now, it's not just the Ministry of Finance that's involved, but quasi-sovereign borrowers as well. Yesterday, the Cabinet of Ministers published its resolution of March 25, appointing the financial company Lazard and the law firm White & Case as advisors to Ukrzaliznytsia (and the state-owned enterprises under its jurisdiction), Oschadbank, Ukreximbank, and the Kyiv City Council in the event of their external debt restructuring. The resolution not only gives the companies the green light but also allows them to bypass a tender process when selecting a restructuring advisor. The advisor, in conjunction with the Ministry of Finance, will then have to align their approach with investors. And investors aren't exactly thrilled about this.
Ukreximbank sent out its restructuring proposal on Friday, towards the end of the working day. It's hardly a comprehensive proposal. Less than a month remains until the maturity of a large state-owned bank issue, meaning there's a catastrophic lack of time for serious negotiations. It no longer matters why Ukreximbank dragged its feet. They can always say they should have waited for the IMF and the government's next steps. The deadline was looming, so investors were hoping for the bank's loyalty. But the bank decided to go its own way, simply asking for a three-month extension on the securities. This time could be devoted to full-fledged negotiations with investors, taking into account the proposal the Ministry of Finance will make to investors.
Ukreximbank won't have a hard time reaching an agreement with investors. At the very least, no one will be willing to give it time for free. So, the bank will likely have to pay 1-2% for the deferment. Investors fear a tougher approach will now be adopted. They failed to get past the government, meaning the Ministry of Finance's proposal will be the benchmark. The first proposal, which creditors will likely reject, will be made very soon. And it promises to be tough, offering to write off part of the debt. Negotiations will then proceed in parallel. Although in the case of Ukreximbank, no one expected a debt write-off; investors were more likely expecting an early repayment of 20-30% of the Eurobond amount. This is especially true given that the bank is of strategic importance to the country's foreign economic activity, and its default could be very painful.
One way or another, the process has begun. And it won't just affect securities due in 2015. For example, Oschadbank, whose next maturity isn't until 2016. Negotiations should begin as early as the first half of 2015, because if the deadline is extended until 2016, investors may not agree to a deferment. In the meantime, banks can easily hide behind the NBU and its fight for hryvnia stability. Agencies will downgrade credit ratings, which concerned media will turn into panic-fueled headlines with the words "state bank" and "default." But behind these downgrades will be technical nuances, standard for any major restructuring. Investors and the government understand this. And when both sides use common sense, reaching a compromise isn't that difficult.
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