The price of certainty: how Ukraine convinced private investors to exchange GDP warrants
30 December 17:03
ANALYSIS FROM 
This year, Ukraine has managed to solve a financial problem that created budget uncertainty and promised unpredictable costs. We are talking about the restructuring of Ukrainian GDP warrants. Why investors agreed to this and what consequences the agreement with them will have for the Ukrainian state – "Komersant Ukrainian" found out.
The Ukrainian Ministry of Finance officially announced the successful settlement of the transaction to restructure government derivatives linked to GDP, or simply GDP warrants, on December 24, the same day the relevant announcement appeared on the Euronext stock exchange website. As the Ministry explained, 99.06% of investors supported the restructuring. This gave the government officials grounds to announce that all GDP warrants had been canceled. Following the agreement reached with investors, Fitch Ratings upgraded Ukraine’s credit rating.
Why did we manage to reach an agreement with investors?
This spring, when the next payment on the GDP warrants was approaching, Ukraine’s representatives met with members of the Special Committee, which included institutional investors holding about 30% of Ukraine’s GDP warrants. They failed to agree with them on the terms of restructuring payments and the payment was not made.
The May overdue payment was special because it was linked to the economic growth rate of 5.3% in 2023. As a reminder, the terms of servicing these government bonds stipulate that any GDP growth of more than 3% per year will mean additional payments to GDP warrant holders.
The relevant terms were agreed back in the summer of 2015, when Ukraine was under pressure from its previous years’ obligations and the holders of Ukrainian debt securities were offered bonds with a higher rate and a bonus in the form of a percentage of economic growth. And just in May of this year, Ukraine was supposed to pay the bonus of more than $600 million. But it did not, reminding the holders of government derivatives that, in accordance with the Government’s decision of August 27, 2024, there is a moratorium on payments on these instruments, which will remain in force until the restructuring process is completed.
The investors’ awareness of this prospect appears to have been one of the motivations for them to agree to the restructuring terms. However, there may have been other reasons for the investors’ intransigence in May. Oleksandr Parashchiy, director of the analytical department at Concorde Capital, explains.
“Before that, there were talks with the situational committee of creditors. I think there were three or four holders who declared that they owned a significant number of these warrants, but it was definitely less than half. And as a rule, such large holders try to bargain very hard to get paid all at once. That is, they definitely did not take the whole situation into account. And Ukraine has simply declared a moratorium on payments, and this moratorium can last for years. And at the same time, our international partners, such as the IMF, support the country in principle,” the expert states.
The May postponement of the payment on GDP warrants ended in a technical default for Ukraine… and continued negotiations with creditors.
Ukraine’s image suffered, and private investors received a negative signal for Ukraine, in particular in the form of a rating from Moody’s, which showed a high risk of default. However, for non-private investors, such as the IMF, this did not become a reason to stop supporting Ukraine. At the same time, it was important for Western creditors that Ukraine reached an understanding with private investors. Oleksandr Parashchiy continues.
“Our international partners, the International Monetary Fund, other creditor countries, and the European Union are also involved here. And the IMF has not just provided moral support. They even wrote in their memorandums that it was desirable that Ukraine should reach an agreement with its creditors and set rather strict requirements to avoid that Ukraine should owe more than it did before,” the expert notes.
And this wish was fulfilled. At least, the Ministry of Finance said that “the agreement reached contributes to the fulfillment of Ukraine’s debt targets under the IMF program and meets the expectations of the Group of Official Creditors of Ukraine.”
Who won and who lost
In its announcement of the December restructuring, the Ministry of Finance, explaining its benefits, claimed to increase budget predictability, strengthen debt sustainability, and help preserve state budget resources. Or, to summarize, the restructuring achieved simply eliminated a significant risk to Ukraine’s public finances.
Here again, it is worth recalling that the bonus that would have been paid to GDP warrant holders over 20 years should have been substantially increased. For example, if the country’s economic growth rate was between 3% and 4%, Ukraine would pay 15% of each percentage point of GDP growth over 3%, and if growth accelerated to 4% and above, it would pay 40% of each additional percentage point.
Although, admittedly, such threatening percentages are more about what could have been than what was. Sergiy Fursa, an investment banker and financial analyst, explains.
“A lot of people criticize warrants, but in fact it was a very profitable story. Having written off 20% of its debt, Ukraine actually paid nothing for more than 10 years, saving a lot of money. But warrants are always a risk, because if we suddenly grow very fast, if such a miracle happens, we would pay a lot. To eliminate this risk, we decided to restructure them,” the expert says.
The Ukrainian Ministry of Finance has already estimated that without this restructuring, payments on GDP warrants in 2025-2041 could reach between USD 6 and 20 billion, depending on the rate of economic growth. Depending on the economic growth rate, this could be as high as USD 6 to USD 20 billion. This unpredictability – in the range of 6 to 20 billion – was stressing both Ukrainian officials and IMF lenders, who advised the Ukrainian side to reach an understanding with investors.
Private investors also had their own dimension of uncertainty. It was not just a matter of “to be or not to be,” i.e., whether Ukraine would pay something given the moratorium on these payments or not. Oleksandr Parashchiy, director of the analytical department at Concorde Capital, continues.
“This uncertainty put pressure on both sides, because for any large fund involved in lending, the simpler the instrument, the better. When you can clearly calculate what the cash flow will be, what the yield will be, what the price will be. And here it is very difficult to calculate anything. That is, everyone did not understand what to get attached to,” the expert notes.
Now there is more certainty. According to the terms of the restructuring, GDP warrants worth USD 2,635,058,000 billion were exchanged for new ones. Were exchanged for new Series C bonds due 2032 in the total amount of USD 3,497,665,320 billion. The new Series C bonds due 2032 were exchanged for new Series B bonds due 2030 and 2034 in the amount of USD 16,904,800 each. USD of each series.
But all these and the above figures do not give an accurate answer to the question: for whom – the Ukrainian Ministry of Finance or private investors – the terms of this restructuring have become more favorable. To find out at least an approximate answer, Oleksandr Parashchiy advises to trace the changes in the price of these GDP warrants.
“When the negotiations started, the price was about 80-90% of the face value. And as soon as the Ministry of Finance announced that there would be a restructuring under certain conditions, the price exceeded 100% of the face value. That is, most creditors were very positive about this news for themselves as creditors. Most likely, they expected the terms to be less interesting. Otherwise, the price could have even fallen, but the price rose by about 10%. Theoretically, the Ministry of Finance could have offered less interesting terms for creditors and more interesting terms for itself. But we cannot say that these are very good conditions for one side or the other. And it is important that it was the creditors who had to make more concessions, at least from the initial May terms, than the lenders. Even though they were asking for the maximum back then. So, the parameters of the final agreement are much closer to the position of the Ministry of Finance. But this simply means that the initial terms of the Ministry of Finance were more adequate,” the expert notes.
Investment banker Sergiy Fursa, on the other hand, is not inclined to pick winners.
“Ukraine wanted to restructure the warrants and did it. That’s all. How expensive will it be for Ukraine? Simply, we will have a debt. And we will need to service this debt. But it will be easier to service,” the expert emphasizes.
Another thing is that Ukraine’s debts are not getting smaller. And there is reason to believe that Ukraine’s debt will definitely cross the 100% of GDP mark, if not this year, then next year. Although the expert community emphasizes that most of Ukraine’s debts have already been restructured and deferred, the servicing of these debts still requires funds. According to Ukraine’s debt strategy for 2026-2028, the state expects to spend an average of UAH 1.193 trillion per year, or 10.4% of the country’s expected GDP, on debt service and repayment. But there is indeed more predictability in the debt issue.
Author: Sergiy Vasilevich
