Ukraine takes first step to avoid default

Ukraine has cleared the first hurdle in a $15bn bid to avoid financial collapse.

Investors in Ukreximbank, the state-owned lender, voted on Monday to extend repayment of a bond that is included in a plan to restructure the country's debt and shore up its fragile finances.

The deal raised hopes that Kiev will now be able to reach a deal with the rest of its creditors.

Ukreximbank's $750m bond is the first due for repayment out of 29 bonds and loans that Ukraine hopes to renegotiate over the next four years. The Ministry of Finance said it welcomed the "overwhelming support" from creditors for the bond extension and looked forward to the next steps in negotiations with debtholders.

One year on from the annexation of Crimea by Russia, Ukraine remains beset by problems that include a falling currency, dwindling foreign reserves and continued violence in the east.

In February the International Monetary Fund threw Kiev a lifeline by announcing a $17.5bn financial aid package.

However the rescue plan hinges in part on co-operation from Ukraine's creditors. These include Russia, which owns a $3bn bond, and the country's largest creditor, US asset manager Franklin Templeton.

This month Kiev warned investors that it was prepared to allow the state-owned bank to default unless a deal could be agreed.

Negotiations had been complicated by a small number of investors holding out for full repayment, said a person familiar with the situation. The first restructuring vote failed to gain support but the second passed after the bank told investors they would not face a haircut on their money if they agreed to extend the maturity date.

Investors said Ukraine appeared keen to stress that this sort of deal would not be available to the rest of the country's creditors.

In a statement the ministry said: "Contrary to Ukreximbank's operation which had to contribute only to liquidity targets, sovereign debt restructuring will also need to reduce debt levels and debt service."

The ministry is eager to moderate expectations, said Tim Ash, emerging markets analyst at Standard Bank. "The message is that the criteria for the two restructurings are different, hence different terms will be applied."

The IMF is counting on a $15.3bn debt restructuring to help plug a $40bn financing gap it has identified in Ukraine and a deal will need to be agreed by June if the country is to receive the next tranche of funding.

International credit agencies have cut the country's rating to one level above default and Ukrainian government debt trade below 50 cents on the dollar, indicating that investors expect to receive back less than the face value of the bonds.

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