UPDATE: What a difference a year makes! At 14%, yes, yes it does. I started my analysis in 2014, which if you think about it, makes no sense since it is already 2015. The following has been rewritten to take that basic error into account. It has a big impact, as you will see.
So I get asked a question about the recent debt relief granted the Ukrainian republic. Is it a lot? A little? Since I was just in California enjoying the weather (or not, it is beautiful back east right now) I will attach a photo to set the mood. I hope I look properly contemplative.
So after about an hour of contemplation, the short answer is ... it is a fairly good restructuring, but it is not great. Kudos to the Ukrainians! Although they need more.
The Ukrainian finance ministry says that the value of the debt will be cut by 20% with no prinicipal payments until 2019. The coupon on the new bonds is increased from 7.25% to 7.75%. There is no break in interest payments.
The right way to calculate the full amount of the “haircut” taken to creditors is to compute the change in the net present value of the debt. That depends, of course, on how long payments are extended for and at what interest rate. Without that, we can’t calculate the correct value of debt relief.
I got a rough idea of the principal payment schedule from Barclay’s. (You can find the key data in graphical form here.) I then calculated the country’s total payments through 2027 under the old deal and the new deal, assuming average coupon payments of 7.25% under the old deal and 7.75% under the new one. Total mickey-mouse, but enough to get some idea of the payment stream under the two deals.
The upshot? Ukrainian sovereign debt is currently yielding around 11.4%. It was yielding around 14% before the deal. If you use 14% as a benchmark, then the new deal is the equivalent of a 33% 44% haircut.
How much is that? Christoph Trebesch of the University of Munich has put together an amazing database of every sovereign debt restructuring since 1970. The average haircut is 38%. The median is 33%. In 2004, Serbia got 71%. Greece recently got (an insufficient) 65%. The Russians got 51% back in 2000. Mexico got 31% back in 1990, at the end of the Latin American debt crisis.
In short, this is about average pretty good! Ukraine does not look to be coming out much ahead.
The deal looks a little even better if we restrict ourselves to the 17 restructurings that involved $18 billion or more. The average haircut on those was 30% with a median of 25%. Ukraine comes out between Venezuela in 1990 and Argentina in 1993. Ukraine does better than all the Latin American restructurings that came out of the 1982 debt crisis. It is bested only by Russia in 2000, Greece in 2012, Argentina in 2005, and Iraq in 2006. (The latter is not really comparable, since it involved odious debt.)
Unless I am using bum data (entirely possible!) the point is made: Bloomberg is probably wrong when it calls the restructuring a wash for creditors, but no extraordinary concessions have been made given the scale of Ukraine’s problems. This deal looks pretty good.
I should add here that creditors will have the option to exchange their debt for receive GDP-linked warrants! (The link goes an earlier discussion of similar instruments on this blog.) The warrants, it seems, will be granted to all creditors in addition to the restructured notes. Or at least that is my current understanding!
The warrants essentially give investors an equity stake in Ukrainian economic performance. On the surface, they look incredibly attractive. As long as Ukraine has a nominal GDP over $125.4 billion, investors will get 15% of all real economic growth between 3 and 4% and 40% of all growth above 4%.
But who would take that deal? First, the payments will not start until 2021. Second, the World Bank estimates that Ukraine’s nominal GDP this year will come to about $94 billion at current exchange rates. Who knows when (or if) its economy will get back above $125 billion? Ukraine may come to regret including the warrants, but I doubt it ... and they are a nice sweetener for the creditors. After all, who knows? Maybe Ukraine will boom beyond dreams of avarice in the 2020s.
In short, this deal looks about average for debt restructurings. this is a good deal, but considering the problems Ukraine is facing, it strikes me as small beans.
Finally, for those who want it, here are my guesstimates of the annual payments in billions of USD that Ukraine faces under the two deals. If anyone can correct them, I would be delighted!
|New deal||Old deal|
|2015||$ 14.4||$ 1.1||$ 1.1||$ 18.0||$ 1.5||$ 1.3||$ 2.8|
|2016||$ 14.4||$ 1.1||$ 1.1||$ 15.8||$ 2.3||$ 1.2||$ 3.5|
|2017||$ 14.4||$ 1.1||$ 1.1||$ 12.3||$ 3.5||$ 1.0||$ 4.5|
|2018||$ 14.4||$ 1.1||$ 1.1||$ 12.3||$ 0.0||$ 0.9||$ 0.9|
|2019||$ 12.8||$ 1.6||$ 1.1||$ 2.7||$ 12.3||$ 0.0||$ 0.9||$ 0.9|
|2020||$ 11.2||$ 1.6||$ 0.9||$ 2.5||$ 10.8||$ 1.5||$ 0.8||$ 2.3|
|2021||$ 9.6||$ 1.6||$ 0.8||$ 2.4||$ 9.3||$ 1.5||$ 0.7||$ 2.2|
|2022||$ 8.0||$ 1.6||$ 0.7||$ 2.3||$ 6.8||$ 2.5||$ 0.6||$ 3.1|
|2023||$ 6.4||$ 1.6||$ 0.6||$ 2.2||$ 5.8||$ 1.0||$ 0.5||$ 1.5|
|2024||$ 4.8||$ 1.6||$ 0.4||$ 2.0||$ 0.0||$ 5.8||$ 0.2||$ 6.0|
|2025||$ 3.2||$ 1.6||$ 0.3||$ 1.9|
|2026||$ 1.6||$ 1.6||$ 0.2||$ 1.8|
|2027||$ 0.0||$ 1.6||$ 0.1||$ 1.7|