Azernews.Az

By Bloomberg

When is owning almost half a nation’s international debt not enough?

For the creditor committee negotiating Ukraine’s Eurobond restructuring, it’s when you need a three-quarters majority to push through new terms on any security. Even though the Franklin Templeton-led group owns $8.9 billion of the $19 billion under discussion, it holds just 26 percent of the shortest-maturity bond, due on Sept. 23, according to data compiled by Bloomberg.

The math matters because a holdout on that security could trigger a default across Ukraine’s entire Eurobond issuance, threatening an International Monetary Fund bailout that the country needs to get back on its feet after more than a year of conflict with pro-Russian separatists. The nation’s bonds rallied to a five-month high last week as progress in talks raised hopes that Ukraine won’t stop servicing its debt imminently.

“The golden threshold is 75 percent if you want to guarantee a deal,” Steven Friel, a London-based lawyer at Brown Rudnick LLP, who has advised on restructurings in Ukraine and Greece, said by e-mail Monday. “If there is an individual series where one or a collection of creditors own more than 25 percent, then they can stop the restructuring.”

Three members of the creditor committee, Franklin Templeton, TCW Investment Management Co. and T. Rowe Price Associates Inc., only hold about 26 percent of the $500 million Sept. 23 note, according to data compiled by Bloomberg. TCW owns the bulk of that share, with about 21 percent, the data show. The fourth member of the committee, BTG Pactual Europe LLP, doesn’t publish its portfolio holdings.

Blocking Stake

A person familiar with the committee’s holdings who declined to be identified said the group owns a blocking stake in the bond, which means at least 25 percent.

Publicly available data don’t give a complete picture of the creditor group’s ownership because some funds aren’t disclosed and the information is published with a lag. The committee is in regular contact with additional holders of notes holding about $1 billion, the group said in a statement in May. A spokesman for the creditor committee declined to comment on its holdings.

“For some series it’s likely to be easy to get over the 75 percent threshold because the committee will hold that amount by itself,” Charles Blitzer, a former IMF official with experience advising on sovereign debt restructurings, said by phone from Washington on July 9. “For other series, other holders need to be convinced that it’s in their interest.”

The creditor group’s job would probably be easier if the bonds included so-called aggregation clauses, which allow a deal to be pushed through on all securities if holders of 75 percent of the total debt are on board.

‘Real Money’

While it doesn’t have enough bonds to push through a deal without other creditors, the committee has a big enough proportion of Ukraine’s total debt that most bondholders won’t try to undermine a deal, Lutz Roehmeyer, who oversees about $1.1 billion, including Ukrainian bonds as a money manager at Landesbank Berlin Investment, said by e-mail Monday.

The fact that the creditor committee is made up of long- term investors also makes it more “powerful,” according to Michael Ganske, head of emerging markets at Rogge Global Partners in London.

“Usually you have hedge funds in these distressed situations, not so much real money holders,” Ganske said by e- mail Monday. “That makes it a very special situation.”

To change the terms on Ukraine’s bonds, 75 percent of bondholders need to vote in favor at a meeting in which two thirds of creditors are represented. Quorum falls to one third at a second meeting if it isn’t reached first time around.

Coupon Due

Ukraine’s Sept. 23 bonds were little changed at 54.72 cents on the dollar at 3:06 p.m. in Kiev, leaving the premium over notes maturing in July 2017 at 0.74 cent. The spread has narrowed from as much as 5.8 cents on June 22 after a threat from Ukraine to impose a freeze on bond payments made it less likely that shorter-maturity bonds would get special treatment if a deal isn’t reached on time.

The country is due to make a $120 million coupon payment on its 2017 note on Friday.

“There’s a possibility that one or more series might not quite get the majority needed and there will be a small amount of unrestructured debt out there, but I don’t think there will be serious holdout problems,” said Blitzer, a director at Blitzer Consulting.