In the years since its independence, Ukraine's public and private sectors have faced one crisis after another. Notwithstanding different factors causing distress and incomparable peculiarities of each, restructuring has always remained one of the key mechanisms to make it through these difficult periods and get back on track. This includes the current crisis due to Russia’s invasion of Ukraine. Even in the present unprecedent environment, inaction is not a solution. Once again, restructuring is the way forward for dealing with both private and sovereign debts, whether long- or short-term, small or huge.
Unprecedented support: payment holidays and security release
In early August, Ukraine received creditor consent to defer by two years approximately USD 6 billion of principal and interest on Ukraine’s Eurobonds. Such terms were supported by 75% of bondholders, whereas the minimum required is 66.7%. Certain changes were also allowed by the holders of around USD 2.6 billion warrants payments under which are linked to Ukraine’s GDP.
Moreover, similar solicitations were approved for two major state companies, Ukravtodor and Ukrenergo. For Ukrenergo, deferments were made in relation to its (first ever for a Ukrainian company) unprecedented green and sustainability-linked bonds worth $825 million, on which CMS CMNO Kyiv acted for the European Bank for Reconstruction and Development with respect to its initial USD 75 million participation as the anchor investor. The EBRD also provided additional support to Ukrenergo by way of repurposing into emergency liquidity part of its EUR 147 million loan, which resulted from the first loss guarantee from the European Fund for Sustainable Development, the EU's external financing arm.
Although not without substantial work and effort, these restructuring approvals demonstrated that support and trust can be gained from creditors even in extraordinary situations. The agreed-upon terms for will help improve Ukraine's foreign currency cash flow (for now), maintain its FX-reserves, and direct funds towards the most pressing needs.
So far, similar support has come from commercial lenders who had provided financing earlier to various Ukrainian businesses. From the early days of the war, both local and foreign creditors granted waivers and/or payment holidays. In some cases, lenders also agreed to release part of their debt service reserves, so that borrowers could apply those for the restoration of the assets that were the main sources of revenues. This enabled them to re-start generating cash in a shorter time.
“Wait and see” not appropriate anymore
With the war still raging, the tendency is to proceed to a more comprehensive review of the financing terms, especially given the fact that the war is unlikely to come to an end in the very near future. When the war ends, it will take time for conditions to stabilise and even more time for conditions to improve. As a result, from time perspective, the “wait and see” position does not appear to be relevant anymore. Moreover, for local banks, financial institutions and capital market participants, proper and timely reporting requirements have now resumed. These participants are again obliged to report to the National Bank and National Securities and Stock Market Commission, including on distressed assets.
Therefore, comprehensive restructurings are on the way. Creditors, as well as conscious borrowers, have already started discussions on the terms of debt restructuring, but given the sensitivity of this process, these restructurings are not being publicised and often remain strictly confidential even after agreements are reached. For those who are still hesitating on whether and how to approach the issue, stimulus is in place.
Taking advantage of Ukraine’s credit rating upgrade
Following sovereign debt restructuring, Fitch upgraded Ukraine to 'CC', notably, ahead of the usual (and strictly regulated) timing for publishing ratings. Fitch viewed this restructuring and its terms as a material change in the creditworthiness of the issuer that allowed them not to wait until the next scheduled review date to announce the new rating. A rating upgrade is certainly an important sign not only for the sovereign debt's creditors, but also for commercial debt creditors, which strengthens the debtors' positions and helps in resolving pressing issues on many fronts. So, it is worth taking the advantage of the moment and start restructuring talks.
Permitted interest payments under cross-border loans
Another recent development opening new horizons and opportunities for restructuring negotiations is the National Bank of Ukraine's (NBU) lifting of the restriction on interest payment under cross-border loans. While relating to the interest accrued during a specific past period only (from 24 February 2022 to 10 August 2022) and being subject to certain conditions, such a relaxation is an important incentive for both parties. It allows creditors to receive payments (as opposed to nothing at all), which under the circumstances reveals greater flexibility in agreeing to restructuring terms. For a borrower it is a good chance to demonstrate an adherence by the undertaking to serve the debt, thus earning more points for reliability in creditors’ eyes.
In some cases the advantage of the permitted interest payment may not be available since some of the conditions may not be met. For example, where a waiver was earlier granted in relation to such payments, the terms of such a waiver shall be carefully analysed to confirm whether interest payments were rescheduled or otherwise amended and whether as a result they can be made now under the amended regulation. Nevertheless, this regulatory change is a sign that further relaxation of cross-border payments will likely be coming. That is what needs to be taken into account when agreeing to restructuring terms in order to utilise the benefits of further regulatory changes (e.g. by contemplating the cash sweep kicking in with the relaxation of more payments).
Voluntary financial restructuring instrument – availability extended until 2028
With the restructuring mechanism as relevant as ever, it is not a surprise that the Law of Ukraine “On Financial Restructuring” was extended to January 2028 (instead of April 2023). This Law on Restructuring provides an instrument that allows for significant flexibility in resolving difficulties with debt servicing by the borrowers in financial distress, which is especially important during a crisis.
Since the moment the law entered into force in April 2017, 58 restructuring procedures were conducted, which reduced the number of NPLs by 30%, amounting to UAH 80.65 billion. This law could have affected the market even more if it had not been adopted so late. After three years of economic crisis linked with the start of Russian aggression in 2014, financial institutions to a significant extent solved their problems with NPLs. However, in the light of the more disastrous Russian invasion of 2022, the Law on Restructuring is just the tool that is needed. Statistics of the National Bank of Ukraine show NPL growth of 260 bp to 29.7% of all loans in the second quarter of 2022. Predictably, the economy of Ukraine will need certain time to recover. Hence the extension of the Law on Restructuring is more than reasonable and may indeed help the businesses to make it through the hurdles of the war and regain prosperity after the war's end.
Lifting requirement of bank guarantees with respect to proprietary claims investments
One more regulatory change that may contribute to restructuring talks is the lifting of the requirement to secure an investment in the form of proprietary claim with a guarantee from a first-class bank and provide evidence of the value of such a claim in foreign currency. Even though this was a technical amendment to the Law of Ukraine “On Foreign Investment Regime”, since in practice this requirement has rarely been complied with and actually verified. Still, its passage demonstrates ongoing efforts to simplify investment procedures to the maximum by eliminating ambiguities, and thus encouraging investors to stay in the country and support their businesses.
It is very much relevant in the restructuring context, where a debt-to-equity swap is one of the instruments often utilised and is especially handy under current cross-border payments restrictions. Although this instrument was used before notwithstanding the mentioned requirement, the legislative changes mentioned above remove any remaining uncertainties or hesitations that that could cause complications for parties, particularly inexperienced ones.
Restructuring – a way forward through turbulence: act sooner than later
For those who so far have managed to survive the war and all its hurdles it is now time to move forward. It is not because the uncertainty has been eliminated. Rather it is because uncertainty is likely to be the norm for quite some time to come. So, while not knowing all the actual impacts of the global energy, food and social crises that are yet to come, and rather ahead of those becoming absolutely clear, development of worse- and best-case scenarios based on the possible financial models and all relevant calculations is the right step to take and with that proceed to work-out solutions and restructuring process. One thing is abundantly clear: when it comes to restructuring, it is best to act sooner rather than later.
For more information on legislative changes and their impact, as well as restructuring advice please contact your CMS client partner or CMS expert Kateryna Chechulina, English law qualified Counsel in Banking & Finance practice at Kyiv office of CMS.
