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So is this what the IMF had in mind when it talked about private-sector burden sharing? The Republic of Ukraine’s attempts to restructure a $155 million bond arranged by ING Barings would seem a significant step in the IMF’s campaign to squeeze more accountability from private investors in crisis-hit emerging markets.
After missing the bond’s redemption date on June 9, Ukraine eventually negotiated an agreement involving a partial repayment and a swap for new bonds to be issued on August 2. The new bonds will be a tap issue from the republic’s existing Dm1 billion international bond maturing in February 2001.
For good measure Ukraine extended the swap offer to holders of a $500 million zero-coupon issue, which is itself the product of the restructuring of domestic treasury bills last September.
The negotiations over the ING bond restructuring were not without incident. Regent Pacific Group, which holds three-quarters of the issue, accused the IMF of “moving the goalposts” and of attempting to force a plain-vanilla restructuring. The fund management firm said it was willing to go to the courts if an agreement wasn’t forthcoming.
So far the IMF has remained tight-lipped regarding the deal. But according to one fund manager, the organization is likely to view the restructuring as a significant victory: “I think they wanted to send a message to the market,” she says.
Eric Lindenbaum, vice-president and emerging markets analyst at Merrill Lynch, agrees: “Frankly I don’t believe the deal would have been done without the IMF stamp of approval,” he says.
The IMF’s rhetoric about burden-sharing has been directed most forcefully at sovereigns with comparatively small private-sector debts. With both Pakistan and Romania having squirmed out of restructuring at the 11th hour, the fund will be relieved to see that its stance has finally amounted to more than just hot air.
“If the IMF wants to put its words into practice this is a good place to do it,” points out Lindenbaum. “You’re looking at a country with no other option than to get funding from [supranational institutions].”
For the IMF Ukraine provides a perfect test platform for what a spokeswoman refers to as “the bailing-in of the private sector” in emerging-market debt rescheduling. There will be the opportunity for any ground rules to be extended to other countries where private-sector debt restructuring seems on the cards – Pakistan, Romania and Ecuador being the three that spring immediately to mind.
Ukraine certainly had little choice but to negotiate a restructuring agreement, or else face a default. The targets set by the IMF for the country’s foreign currency reserves would be impossible to meet without some form of debt rescheduling. Reserves must rise from around $700 million to $1 billion by early 2000 if the country is to a receive a three-year aid package worth $2.2 billion.
The structure of the deal means that holders of the ING-led bonds will receive a 20% cash repayment, with the remainder of their bonds exchanged for the Deutschmark issue. In addition, the creditors have guaranteed the participation of new investors in the Deutschmark re-opening, although quite where they have found these buyers is a mystery to observers. Says one London-based analyst: “They’re implying that they are going to bring new money into the Ukraine with the tap of the Deutschmark issue. Quite frankly, that seems very unlikely.”
Prior to the announcement of the exchange deal, the Deutschmark 2001 bond had been by far the best performing of all Ukraine’s outstanding bonds. This was largely a result of the fact that the bond was widely distributed to around 5,000 buy-and-hold retail accounts.
But with the announcement of the restructuring deal, and the subsequent widening of the exchange offer to include investors in the $500 million zero-coupon bond, the price of the 2001 bond plummeted. From trading at 80% of face value, “an entirely unrealistic price” says one trader, the bonds backed up to 64% of par within a week. It suggests private-sector burden-sharing in the widest possible sense, with retail investors being punished along with the professional speculators. The zero-coupon bond holders had, after all, originally bought domestic market treasury bills.
“You’re diluting the 01 bond with speculative accounts, which is going to irritate the retail market,” observes one analyst. Others suggest that retail investors should be held just as culpable for their investment decisions as the professionals and say the IMF is unlikely to be perturbed by the outcome.
What all agree on is that this is likely to be just the first hurdle Ukraine needs to negotiate in terms of rescheduling its private sector debt. An €575 million bond due next March looks increasingly vulnerable, and without a restructuring agreement there are cross-default implications for the much larger Deutschmark issue.
As Lindenbaum observes: “They’re going to continue to do the ‘voluntary’ reschedulings, and the Eurobonds due next year look at risk. Call it what you like, but the creditors don’t have much choice.” James Rutter
