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By Bloomberg

After four months of losses that sent bond prices down by about 50 percent, Ukraine debt is rallying on optimism the International Monetary Fund will sign off on a $17.5 billion loan today.

Bankruptcy probably averted, but now the hard work for bondholders begins.

While the nation’s Eurobonds have advanced from record lows, there may be little room for further gains until the details of a planned debt restructuring are known, according to Morten Groth at Jyske Bank A/S. The IMF loan, its second aid package in 11 months, comes after the ouster of Moscow-backed President Viktor Yanukovych in February 2014 started a chain of events leading to Ukraine’s loss of Crimea and its industrial heartland amid a pro-Russian insurgency in the nation’s east.

“A signoff with the IMF will be positive for bondholders, but I’m not sure that it will mean that private bondholders will avoid a principal loss,” Groth, a Silkeborg, Denmark-based money manager who helps oversee about $1.5 billion in debt, including Ukraine bonds, at Jyske Bank, said by e-mail Tuesday. “There are a lot of unknown or unsolved factors involved.”

Ukraine’s $2.6 billion of benchmark debt due July 2017 fell 0.3 cents to 46.41 cents on the dollar by 11:25 a.m. in Kiev, paring the biggest gain in more than six weeks on Tuesday and taking the yield to 50.48 percent. The nation’s dollar bonds have returned 5.4 percent this month, the best performance among 59 developing nations in the Bloomberg Emerging Market Sovereign Bond Index.

Pain Relief

Such gains provide only some pain relief for longer-term investors, who have lost 34 percent in the past 12 months as they brace for debt-structuring negotiations that aim to save Ukraine as much as $15 billion over four years.

Ukraine’s IMF-led international bailout also includes $9 billion in bilateral loans from agencies and governments, taking the total package to about $40 billion. Some of the money will be used to replenish the country’s foreign-currency reserves, which fell to a record $5.6 billion in February, and some to the national budget.

Approval was in jeopardy as recently as Feb. 27 when the hryvnia weakened to an all-time low 34.247 to the dollar. The currency has since appreciated 53 percent as the central bank imposed capital controls and raised interest rates to 30 percent, the world’s highest. The hryvnia weakened 2.3 percent to 22 per dollar on Wednesday, retreating from the strongest since Feb. 5.

‘Fully Discounted’

“The IMF signoff and cash are fully discounted by now,” Richard Segal, the head of emerging-market credit strategy at Jefferies in London, said by e-mail. “I don’t expect any reaction in bond prices and I also view it as highly unlikely at this point that the signoff would be postponed.”

Bondholders are in the dark as to what the government’s opening offer will be in any proposed restructuring. It may take the form of a maturity extension, a reduction in the principal or a cut in the size of the coupon, according to Giuliano Palumbo, a money manager at Arca SGR SpA in Milan.

Given the number of “unforeseeable variables,” such as the participation rate, a price of 41 cents on the dollar could be a “fair price” for the nation’s bonds for now, he said.

The government in Kiev will begin talks with investors after the IMF board approval of the loan, Daria Marchak, a Finance Ministry spokeswoman, said by phone on Tuesday. She declined to give further details. Ukraine is battling its worst recession since 2009 as the war devastates industry, destroys confidence and drains budget revenue.

Russian Role

Russia, which has denied U.S. and EU accusations that it’s sending troops and weapons into eastern Ukraine to help the rebellion, also has a role to play in the coming debt talks. It owns $3 billion of Ukraine bonds due in December and Finance Minister Anton Siluanov said that his country “isn’t ready” to discuss any changes in the terms of the securities.

Ukraine may avoid writedowns on the principal and stick to a “straightforward extension of maturities,” Paul Rawkins, a senior director at Fitch Ratings, said in an interview this week. The company keeps the sovereign at CC, the lowest junk grade that isn’t in default.

“The IMF cash does mean a lot,” Arca SGR’s Palumbo, who helps manage about $3 billion in emerging-market debt, said by e-mail on Tuesday. Without it, the market wouldn’t trust any recovery and creditors wouldn’t accept restructuring, he said.