Ukraine plays hardball on bank debt restructuring

Ukraine will on Friday tell investors that it will allow a state-owned bank to default unless a deal with creditors can be agreed as the embattled country takes an increasingly tough approach to debt negotiations.

While attending International Monetary Fund meetings in Washington, Ukraine's Minister of Finance Natalie Jaresko will likely say that a three month extension on debt issued by Ukreximbank is crucial to the success of the country's sovereign debt restructuring.

However, the negotiations are being complicated by a small number of investors who are holding out for full repayment and may have a sufficient stake to block a deal, according to a person familiar with the situation.

The move reflects how high the stakes have become in Ukraine's debt operations as it seeks to save $15.3bn over the next four years in order to meet the terms of a multibillion-dollar bailout by the IMF.

Fresh fighting between government troops and Russian-backed forces in parts of eastern Ukraine this week has aroused concerns that the latest ceasefire signed in Minsk in February could be unravelling. Investors fear that with foreign reserves dwindling, Kiev is swiftly headed towards bankruptcy unless a deal with creditors is reached.

Ukreximbank's bond is one of 29 bonds and loans that Ukraine has included in a restructuring programme that it says must be completed by June in order for the country to qualify for the second part of the IMF bailout.

Ukraine has said that haircuts must be imposed on investors if the country is to stave off default. However bondholders, which include Russia, appear unwilling to accept any writedown on their investments. A group of five investors including Franklin Templeton has approached the government with a proposal for debt restructuring without a haircut, while Russia's finance minister has been reported in local media as saying the country will turn to arbitration courts if it is not repaid a $3bn bond due in December.

Ukreximbank's $750m bond due this month will be the first milestone of the country's wider debt operations and a crucial test for its success.

A restructuring vote failed earlier this month to gain support from the bank's creditors and the next vote will be completed on April 27, the day Ukreximbank's bond is due. To sweeten the deal, investors have been told they will not face a haircut on their holdings if they agree to the maturity extension.

Like Ukraine's sovereign bonds, Ukreximbank debt trades below face value on secondary markets, indicating that investors are expecting a reduction on their holdings. A number of domestic companies have already defaulted on their debts since last year as recession grips the country.

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