The asset manager held a majority in many of the issues, allowing it to block the restructuring until it got terms that satisfied it. In Ukraine’s defence, it went into the restructuring with a disadvantage - around 40 percent of outstanding bonds were held by Franklin Templeton. Nigerian warrants were triggered at a $28-per-barrel crude price but stopped paying above $43 a barrel. Argentine payouts could not exceed 48 percent of the warrant’s face value. Greece capped warrant coupons at 1 percent of the notional amount. Investors may accept restructuring terms which are less onerous to the borrower if promised a slice of future growth.Ī 2006 IMF study advised though that “all (warrant) payments are capped to ensure that in the event of extreme growth surprises, cash-flow payments do not exceed the country’s capacity to service debt”. The idea is to give a country breathing space, allowing it to pay less during an economic slump. Countries such as Nigeria and Venezuela have also offered oil warrants which paid out in event of an energy price windfall. GDP warrants have been used in other debt restructurings, notably by Argentina in 2005 and Greece in 2012. (Buyback cost) is only set to rise, and potentially quickly,” Ash added. “I argued the structure (of the warrants) was inappropriate for Ukraine and I think this is now showing effect. In its latest World Economic Outlook, the IMF forecasts growth at two percent this year, rising to four percent in 2020.ĭanylyuk estimated the economy’s current size at $95 billion, well under the payout threshold.īut BlueBay strategist Tim Ash says Kiev must prioritise buybacks, adding that Ukraine could well emulate central European economies such as Poland’s which achieved 4-5 percent annual growth for years as they recovered from economic collapse after the fall of Communism in 1989. Ukrainian institutions give differing figures for GDP growth but the payouts depend mostly on International Monetary Fund data. Buying them back now would cost Kiev over $1.6 billion. With recent data showing the economy slowly recovering, the warrants’ price has almost doubled this year to 60 cents in the dollar. Nazli, however, described Ukraine as “a bit stuck”. He was on a roadshow to market new dollar debt and persuade investors to swap bonds maturing in 20 for longer-dated ones. Without the payout cap that is effective between 20, the bill would have been $2 billion, he says, predicting Ukraine would instead buy back the warrants “to reduce the burden for future generations”.įinance Minister Oleksandr Danylyuk told Reuters that “as part of our liability exercise, we can look at warrants at some point” but declined to comment further. To illustrate what Ukraine might face, Nazli calculates a $120 million payout in 2021 in a scenario where 2019 growth is 3.5 percent, leaping to $1.6 billion if growth hits 6 percent. Even now, with the country still in conflict with Russia, it is impossible to predict what future payouts may look like. But for the government, this may be a high contingent liability going forward,” said Kaan Nazli, senior economist for emerging debt at Neuberger Berman, an asset manager which holds the warrants.īack in 2015, Ukraine was deep in recession and 3-4 percent growth seemed a distant prospect. “If you take a positive view of Ukraine in the long term, this is where you want to be. FACTBOX:Īnnual interest payouts cannot exceed 1 percent of GDP until 2025 but after that, until expiry in 2040, there is no upper limit. Should the economy expand 4 percent or more, holders will take away no less than 40 percent of national wealth created above that higher level. Payouts are subject to a complex formula but, put very simply, holders are entitled to a sum equal to 15 percent of any economic output achieved above this growth threshold, adjusted for inflation. The warrants pay no regular interest but they kick in once Ukraine’s nominal GDP exceeds $125.4 billion and annual growth hits 3 percent. But Kiev made one crucial omission: unlike other warrant issuers, it did not cap future payouts, possibly making itself liable for big annual payments after 2025.
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