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By Bloomberg

Renegotiating about $19 billion of Ukrainian debt may be about to get even tougher for bondholders.

Just two days after Bloomberg reported details of a restructuring offer from creditors based on International Monetary Fund economic projections, the IMF deepened its forecast for how much Ukraine’s economy will shrink in 2015 to 9 percent. That may mean the proposal no longer meets the fund’s debt-sustainability targets, forcing creditors to accept a writedown they’ve insisted is unnecessary.

“It looks like the change in the assumption is likely to make the current creditor proposal outdated,” according to Dmitri Petrov, a London-based analyst at Nomura Holdings Inc., who expects creditors will end up accepting a 15-20 percent so- called haircut. It’s “more likely to support the argument that a haircut is inevitable,” he said by e-mail on Tuesday.

A return to the drawing board would make it harder to hammer out a deal as an escalation of fighting with pro-Russian separatists in its easternmost region endangers a three-month cease-fire. Any sign that bondholders are losing ground in negotiations would also threaten a rally that made the nation’s bonds the best performers in emerging markets in the past month.

One of the three targets set out in the IMF’s $17.5 billion loan is for Ukraine to reduce public debt to less than 71 percent of gross domestic product by 2020, from an estimated 94 percent this year.

If the fund decides that Ukraine’s indebtedness is actually closer to 100 percent of GDP, creditors will have to take bigger losses if the nation is to reach its goals.

Creditor Offer

A proposal from a bondholder group led by Franklin Templeton suggests Ukraine can meet the IMF’s targets without imposing a writedown on creditors if it cuts coupon sizes and extends maturities by up to 10 years, a person with knowledge of the committee’s thinking told Bloomberg last week. Ukraine’s bonds have returned 4.3 percent since those details were revealed May 29, the most among 58 countries in the Bloomberg U.S. Dollar Emerging Market Sovereign Bond Index.

The committee, which owns about $8.9 billion of Ukrainian debt, submitted the proposal three weeks before the IMF revised its 2015 GDP forecast on May 31. The fund said the conflict in the country’s east “took a heavier-than-expected toll on the economy” in the first quarter, when GDP shrank by a worse-than- expected 18 percent.

Outstanding debt could climb toward 100 percent of economic output this year, according to Vitaliy Sivach, a Kiev-based bond trader at Investment Capital Ukraine.

Worsening Outlook

“It won’t be a surprise if the IMF change their debt-to- GDP forecast,” Sivach said by e-mail on Wednesday. “The economy is in freefall, things are changing fast on the ground and the IMF has to react to that.”

A spokesman for the committee declined to comment on how the group might adapt its proposal when contacted by phone on Thursday. An IMF spokeswoman declined to comment on whether the fund will revise its debt-to-GDP forecast for Ukraine when contacted by e-mail on Thursday.

Not everyone agrees that a writedown need be on the cards. The IMF also revised its year-end inflation forecast to 46 percent from 25 percent on Sunday, giving the lender room to reduce its debt-to-GDP projection by 9 percentage points, JPMorgan Chase & Co. said in a June 1 research note.

Ukraine’s budget surplus in the first four months further alleviates pressure on the country, according to analysts led by Nicolaie Alexandru, who expect a return to economic growth next year. The revisions “would suggest that it is getting more complicated for Ukraine to argue for principal haircuts,” they said.

Talks Planned

The country may mention IMF forecast changes during a call with creditors Friday, Nomura’s Petrov said, referring to talks planned for tomorrow between the Finance Ministry and creditors.

Ukraine’s $1.25 billion of bonds due April 2023 climbed 1.8 cents to 54.5 cents on the dollar by 10:44 a.m. in Kiev on Friday, extending this week’s gain to 2.7 percentage points.

“The downward revision of the forecast will lead to some deterioration in the debt metrics,” Jakob Christensen, an economist at Exotix Partners LLP in London, said by phone on Monday. “The IMF will say this takes us further away from the 2020 goal and it requires more action from the creditor side.”