Ukraine’s bondholders formally signed off on September 3 on the deal for restructuring $20bn of debt, which will result in repayments being suspended for several years and will take the pressure off the cash-strapped government.

Kyiv has confirmed that holders of over 97% of its debt agreed to the restructuring plan by the required deadline, allowing the process to move forward. The deal is set to reduce the face value of Ukraine’s international bonds by $11.4bn, or more than a third, over the next three years.

Doing the deal was a key condition set by the International Monetary Fund (IMF) to ensure the country’s debt remains sustainable. An IMF team is due in Kyiv this week to discuss the conditions for releasing the next tranche of Ukraine’s Extended Fund Facility (EFF) support worth billions of dollars.

While Ukraine’s ability to return to international capital markets hinges on the end of the war with Russia, finalising the restructuring represents a “crucial step” for the country ahead of the eventual reconstruction when Ukraine will have to raise billions of dollars from private investors, according to Finance Minister Serhiy Marchenko. He said that the agreement would “ensure Ukraine maintains the budget stability needed to continue financing our defence” and is pivotal in restoring long-term economic stability.

Bondholders had granted a two-year payment suspension in 2022 after the onset of the conflict, but Ukraine found this insufficient, requiring a major bond debt restructuring this year to maintain the flow of IMF loans. The restructuring will reduce the cost of the debt by approximately 60%, with Ukraine resuming interest payments at a significantly lower rate after the suspension, which officially expired in August, UBN reports.

The deal will involve bondholders writing off 37% of their claims, with the debt write-off potentially decreasing to 25% if Ukraine's GDP exceeds IMF targets set for 2028.

Bondholders will receive new bonds worth 40 cents on the dollar of their original holding, with interest payments restarting immediately. The payments are scheduled to start at 1.75%, rising to 4.5% in 2026, 6% in 2027, and reaching 7.75% from 2034 onwards.

Additionally, bondholders will receive a second bond series worth 23 cents on the dollar, which will not pay interest until August 2027. However, this bond’s value could increase to 35 cents if Ukraine’s economy outperforms IMF targets by at least 3% by 2028. The new bonds are expected to start trading on 30 August, once the final details of the restructuring are settled.

The newly agreed restructuring only covers Ukraine’s international market bonds, which account for $24bn, or approximately 15% of the country’s total debt, which exceeds $140bn.

Additionally, Ukraine still needs to negotiate a separate restructuring deal in the coming months of $2.6bn in GDP warrants issued during the 2015 restructuring and that were just starting to pay out to investors before the war started.

Real challenges may arise in 2027 when Ukraine's official creditors will need to restructure their own debts at the end of the current IMF programme. Kyiv is expected to record a deficit of $43bn this year to cover high military expenditures amid delays in Western aid earlier this year.

Government short of cash

The government is already running short of money as there is a $12bn hole in the budget due to increased military spending and the government is mulling raising taxes and cutting non-essential spending to cover the shortfall. Ukraine will also need to cover a budget deficit of $35bn next year. The Ministry of Finance (MinFin) has also said there is a $15bn hole in the 2025 budget forecast too, due to dwindling international support.

In August, the state budget's general fund received about $8.4bn in external financing. As noted by the Ministry of Finance, $5.5bn comprised grants (65%), and $2.9bn arrived through preferential financing. This includes $4.5bn in concessional financing and a grant from the EU and a $3.9bn grant from the US.

The funds from the EU are the first regular tranche (provided upon fulfilment of conditions) within the framework of the Ukraine Facility. The financing consists of a $2.9bn loan and a $1.6bn grant.

Kyiv received the grant from Washington through the World Bank's Peace in Ukraine project. The funds are to be used for salaries of teachers, emergency responders, civil servants and social expenses. In total, this year Ukraine has already received $24.5bn in external funding, including $6.6bn in grants.

In addition, in August the state budget’s general fund received UAH386.2bn ($9.4bn) in taxes, fees and payments. This is 200% more than in July.

Last-minute deal

This restructuring is the second Ukraine has been forced to undertake in a decade following Russian military aggression. The previous restructuring occurred in 2015 after Russia’s annexation of Crimea. The current process required the backing of at least two-thirds of Ukraine’s bondholders, along with a simple majority in each of the individual bond series involved.

The negotiations, which took only four months, proceeded at an unprecedented pace, replacing a two-year bond payment moratorium granted to Ukraine in the summer of 2022, now nearing expiration.

Yuriy Butsa, head of Ukraine’s debt agency and a central figure in the negotiations, remarked on the unique nature of this restructuring. “This has not been driven by any unsustainable economic policies,” Butsa told Reuters. “It is driven solely by the Russian aggression against Ukraine,” adding that the process had been one of the quickest debt restructurings in history.

The Group of Creditors of Ukraine, comprising the country’s bilateral lenders, including Canada, France, Germany, Japan, the United Kingdom and the United States, welcomed the agreement.

“The swift implementation of the exchange demonstrates substantive support for the government and people of Ukraine by providing substantial debt relief,” the group told Euroactiv.