National Bank of Ukraine denies negative impact of missed GDP warrant payment

MOSCOW. June 6 (Interfax) - The National Bank of Ukraine (NBU) does not see any immediate negative impact after Ukraine missed a June 2 payment of $665.5 million on its GDP-linked warrants or further risks for financial stability, Ukrainian media said.

"We do not see any negative manifestations [...], not a single one. Negotiations to formulate conditions for restructuring are continuing," Ukrainian media quoted NBU Deputy Governor Yury Gelety as saying at a briefing.

The NBU is not a party to this process, though the bank's portfolio contains GDP-linked warrants worth $44 million out of the total issue of $3.239 billion, Gelety said.

"A moratorium on such payments has been in effect since last year. Therefore, everything is under the government's control, and there are no risks for financial stability," he said.

The Finance Ministry said in late May that Ukraine will adhere to the moratorium on GDP warrant payments introduced on August 27 last year until their restructuring is completed.

"Ukraine remains committed to implementing a comprehensive, fair and equitable restructuring of GDP-linked securities to ensure compliance with the debt targets set in Ukraine's IMF program and the principle of comparability of treatment with Ukraine's official bilateral partners," the ministry said.

After Ukraine skipped the June 2 payment on its GDP-linked securities, the Standard&Poor's international ratings agency downgraded the GDP warrants' rating from 'CC' to 'D' (default), at the same time affirming Ukraine's 'SD/SD' (selective default) foreign currency (FC) rating and the 'CCC+/C' local currency (LC) sovereign credit ratings on Ukraine.

The Ukrainian government held a meeting from April 15-23 with certain members of an ad-hoc committee of institutional investors holding around 30% of Ukraine's GDP warrants and submitted its proposals for restructuring the related obligations. Ukraine's proposal for GDP warrant holders contained two options. The first provided for the exchange of GDP warrants for Eurobonds issued in the framework of their restructuring in 2024. Under this option, investors will receive the same set of A bonds and B bonds as last year's Eurobond holders with an exchange ratio of 1.35x.

The second option was to waive payments on GDP warrants in 2025-2028 if economic growth exceeds 3% in 2023-2026, and an amendment to the call option. The latter provided for deferring it until May 31, 2029 and modifying the redemption price with a gradual increment to 85% of the notional amount until May 31, 2027, 90% until May 31, 2028, and 100% until May 31, 2029. The restructured warrants (with payments due in 2029-2041) will have the same properties as the current warrants, except for the buyback option, and their holders will additionally receive 36.6 cents of A bonds and B bonds for every 100 cents of warrants.

The restructuring requires consent from 75% of the holders by the aggregate nominal value of GDP warrants from the warrant holders present at the quorum meeting.

However, the ad hoc committee of GDP warrant holders rejected this offer and invited Ukraine to provide 75%, or $406 million, of the payment due in May 2025 to warrant holders for GDP growth in 2023 and issue new C bonds with a rate of 7.75% for an amount of $209 million maturing in February 2029. Ukraine rejected this offer.

Ukraine's GDP warrants on the Frankfurt Exchange are traded at 69.00 of their notional face value today, which is 0.20% less than the previous day.

Ukraine reached an agreement with holders of its GDP warrants in August 2022 to revise the conditions on them, specifically, to defer payments due in 2023 by 14 months, limit the possible amount of payments in 2025 for 2023 at 0.5% of GDP, extend the duration of these instruments by a year, until 2039, and also give Ukraine the right to completely or partially repurchase them in 2024-2027. It was agreed that the payment due on May 31, 2023 for strong economic growth in 2021 would be deferred until August 1, 2024, and it would accrue 7.75% interest per annum.

Under the initial terms of the GDP warrants, which were issued as part of restructuring Ukraine's government debt in 2015 in exchange for Eurobond for a conditional amount of around $3.239 billion, if GDP growth is lower than 3% for the year, no payments are made on the warrants. If real GDP grows by 3% to 4%, the payment on the warrants is 15% of the amount by which GDP exceeds 3%, and if growth is higher than 4%, another 40% of the amount by which GDP exceeds 4% is paid. However, payments were initially restricted to 1% of GDP from 2021 through 2025. The absence of such restrictions on payments after 2025 in the event of strong GDP growth was criticized by some politicians and experts in the country.

Prices for the GDP warrants since they were issued have gone as high as 110% of their notional face value and even higher, but they are now quoted at about 58%, their highest since February 2022, since when they have fallen below 20%. Following Donald Trump's victory in the U.S. presidential election and expectations that the crisis could end soon, GDP warrants traded as high as 86.35% of their face value in early February 2025, but again dropped to 60% of their notional face value as frustration grew.