The GDP warrants that Ukraine gave its sovereign bond holders as compensation for a 20% haircut have appreciated in price and hit par on January 14.

The instruments are linked to the country's economic growth and can start paying out from this year if the economy is worth more than $125bn and GDP growth is more than 3% – both criteria which are almost certain to be met in 2020.

Warrants had traded in the highs 40s on issuance, went sub-30 for much of 2016, but have since been steadily recovering, and came close to doubling in price from mid-2018 to the end of 2019, reports Tim Ash, senior sovereign strategist at BlueBay Asset Management.

Investors returned to Ukraine’s bond market in 2019 after the domestic capital market was hooked into the Clearstream international payment and settlement system. In all, bond traders invested more than $4bn into the local market, driving yields down from 19% at the start of the year to c.13% by the end.

The rapid fall in inflation, extremely high real interest rates that are now being rapidly slashed by the National Bank of Ukraine (NBU) and the rising gross international reserves (GIR) have all combined to make Ukraine very interesting to bond investors.

The price of the warrants has also risen on the back of the optimism that arrived with the election of Ukrainian president Volodymyr Zelenskiy in April, who offered yet another opportunity for Ukraine to make peace with Russia and finally implement the comprehensive reform package needed to kick-start economic development.

Investors have not been disappointed, as Zelenskiy got off to a fast start, introducing a hectic legislative programme that has seen many long overdue reforms put in place. And the peace process is on track after a Normandy Four meeting in Paris on December 9, the first such meeting in three years, resulted in a new ceasefire and prisoner swap.

The warrants were growing in price throughout 2019 as the new government promised fast growth that could lead to the warrants paying out as much as 1.5% GDP to their owners. Ukrainian Prime Minister Oleksiy Honcharuk expects that Ukraine's GDP will grow by 5% in 2020, and over the next five years the government will ensure that the economy expands by "at least 40%", he said on September 2. If that happens the government could be on the hook for billions of dollars in payments to warrant holders. The potential cost of these payments has led to speculation that the government may try to negotiate terms with the warrant holders. However, thanks to lower than expected growth Ukraine is not expecting to make significant payments on its warrants in 2019 or the next two years, the government said in December.

“Its a bit tricky now for the Ministry of Finance, given that par pricing means a $3.4bn or thereabout liability, which looks set to begin to pay out as real GDP growth stays/accelerates above 3%,” Ash said in a note emailed to clients.

“The above, though, still leaves the 2015 restructuring as very "friendly" from a bondholder perspective. Maybe the MOF could have negotiated harder – but in the end, the deal was done quickly, Ukraine moved on, and now is beginning to reap the benefits from much lower debt ratios, much lower perceived country risk, and lower borrowing costs. Playing hardball with investors, dragging negotiations out for the extra nickel, would have stalled Ukraine's re-entry onto international capital markets and stalled the downturn in credit price and borrowing costs for Ukraine Inc.,” concludes Ash.