LONDON, Sept 11 (Askume) – Ukraine is seeking action on an additional $2.6 billion of GDP warrants after a fresh $20 billion debt restructuring . These are bond-like instruments that pay out large sums of money if a country’s economic growth exceeds a certain threshold.
Here are some key details about how the arrest warrant works and why Kiev is changing it.
What’s the problem?
Ukraine fears the warrants in their current form could cost billions of dollars over the next decade as the country’s economy rebuilds after Russia’s 2022 invasion .
Kiev will also have to deal with the warrants under a deal with international backers. The International Monetary Fund has pushed for debt restructuring under its $15.6 billion loan program to improve the country’s financial position.
In a statement on Wednesday, after reaching a preliminary agreement on the fund’s next distribution , the fund reiterated that the warrants “should be processed in accordance with the plan’s strategy to restore debt sustainability.”
How do they work?
Ukraine introduced GDP warrants, fixed income securities linked to economic growth, to ease pressure following its 2015 restructuring, which forced investors to write down 20% of the original value of their holdings.
They do not make periodic interest or principal payments, but they begin when Ukraine’s nominal gross domestic product (GDP) exceeds $125.4 billion and grows at an annual rate of 3 percent. By next year, their annual payments cannot exceed 0.5% of GDP, but after that, there is no limit until they end in 2041.
The payments follow a complex formula, but in simple terms, holders are entitled to an amount equal to 15% of any economic output (adjusted for inflation) above a 3% growth threshold.
If the economy grows at 4% or more, holders will own at least 40% of the national wealth created above this high level.
How much will this hurt Ukraine?
Between now and 2041, that number could easily reach billions of dollars.
Major institutions expect Ukraine ‘s growth to accelerate to around 6% next year and remain strong for several years if a massive reconstruction effort begins .
What does Ukraine want to do?
The government can choose to repurchase the warrants using what is called a “call” option. It can do so any time before August 2027, but it must pay the warrant holders in full. It will be difficult to raise the $2.6 billion needed given the war with Russia and Ukraine’s financial pressures.
Kiev could offer to replace them with something simpler and more predictable, such as traditional bonds – although this would require some good incentives to convince warrant holders to switch.
He promised them “fair and equitable treatment” in any renegotiations, but said they would face “extremely high and unpredictable compensation” if they did not resolve the issue.
What about warrant holders?
They are preparing for a fight. Several unnamed investment funds holding warrants have formed a group that they say is so deeply in debt that it can legally block any changes they disagree with.
Some of those involved argue they have made many sacrifices to help Kiev , such as deferring payments and lowering the GDP cap from 1% to 0.5% by 2025, and have saved money over the years.
Is it possible to solve this problem?
Kiev said yes, although that could take some time. Ukraine needs a deal that gives it and its main international backers a clear view of its debt, while the warrant holders want to avoid a situation in which Ukraine simply refuses to pay.
