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Ukraine has said it will default on about $600mn it owes to holders of $2.6bn of its debt after an impasse in talks to restructure a key part of Kyiv’s war finances.
Ukraine’s finance ministry said on Friday that it would skip a payment of about $600mn due on Monday on the country’s so-called GDP warrants — debt that has annual payouts linked to economic growth.
The ministry said in a statement that it wanted to “remind” debt holders that there was a moratorium on payments until a complete restructuring of the GDP warrants had taken place.
Investors in the warrants had been bracing for a default since the failure of talks last month between Ukraine and a group of significant holders of the debt.
GDP warrants were first introduced in 2015 as a way to attract investment into Ukraine and pay out in line with any future GDP increases above 3 per cent.
But they could cost the country billions of dollars in the event of a ceasefire with Russia and a return to economic growth. Kyiv has argued that they are outdated and designed for “absolutely different times”.
The default does not have broader implications for Ukraine’s bonds as a cross-default clause between the warrants and bonds was removed last year.
Ukrainian officials met other debt holders in recent weeks to gauge reaction to last month’s failed talks, people familiar with the matter said. But a default looked inevitable to signal an unwillingness by Ukraine’s official creditors to approve payments to private investors that hold the warrants, they added.
The June payment was linked to Ukraine’s 2023 GDP growth of 5.3 per cent that came off a 30 per cent drop following Russia’s full-scale invasion in February 2022. Future payments are due annually in June.
The IMF has warned that the GDP warrants pose “an important risk” to Ukraine’s future debt sustainability “if left untreated”, despite a $15.5bn bailout and $20bn debt restructuring last year.
The warrants were left out of last year’s restructuring because of their complexity and the different make-up of their investor base.
Ukraine’s finance ministry is trying to forge a deal with the warrant holders to either exchange them for bonds or to change the call options on the warrants after 2028, arguing that the outlook is too uncertain until then.
People close to the discussions, which have continued in London in recent weeks, said that the warrant holders had not fully responded to Kyiv’s offer. Instead they proposed a restructuring of the June 2 payment so that some could be paid in bonds rather than all in cash.
Roger Mark, an analyst at the asset manager Ninety One, said that there had been an expectation that Monday’s payment would not be made: “Prolonged negotiations seem quite likely given the investor base and the Ukrainian government (backed by official creditors) seem reluctant to include any cash as part of the offer.”
Ukraine has already bought back about a fifth of the original $3.2bn issuance of the warrants.
