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Ukraine starts a negotiated exchange of Eurobonds on September 23 in line with the agreement reached in August with its private creditors, and entailing a suspension of due debt repayments. The operation, which can put Ukraine in a state of anticipated technical default, is expected to be finalised by December 1. 

"Following the adoption [on September 17] by constitutional majority of the Verkhovna Rada [parliament] of the necessary legislation for the debt restructuring operation, the Cabinet of Ministers of Ukraine has authorized today the launch of the corresponding exchange of Eurobonds," the Ukrainian Finance Ministry said in a statement published on September 22.

Finance Minister Natalie Jaresko called on all bondholders to support the exchange. "It will implement the agreement reached end August with our largest creditors. As has been stated by the President and the Prime Minister of Ukraine, and is made clear in the exchange documentation, no creditor will be offered better terms than those of this exchange," Jaresko added.

The ministry's statement also drops Russia's $3bn Eurobond from its calculations, which eliminates a major sticking point of the talks to restructure some $18bn in bonds in recent months. The Russian bond purchased in 2013 from the previous Ukrainian government is due for redemption in December, and Moscow has repeatedly stated that it expects to receive the full sum.

Meanwhile, according to Bloomberg, if Ukraine fails to pay its $500mn Eurobond due on September 23, the move is likely to trigger a so-called "credit event", which means payday for the holders of insurance contracts known as credit-default swaps. This could push Ukraine into technical default and risks driving its credit rating to the lowest D level.

The overall exchange operation will provide participating investors with new financial instruments, in line with the agreement reached with a committee of creditors headed by Franklin Templeton. Under the deal, Ukraine will get a 20% writedown of the face value of its notes; the investors also agreed to maturity extension to 2019-2027 from 2015-2023, and a uniform coupon rate of 7.75% (compared with 4.95-9.25%).

In order to facilitate completion of this exchange offer by targeted timeline, the Ukrainian government also introduced "a temporary suspension of payments under certain instruments" as envisaged under the agreement and provided for in the operation's launch terms, according to the finance ministry statement.

Shortest-dated bonds dilemma

Ukraine's move appeared against a background of growing disagreement of a group of holders of the country's shortest-dated bonds with the deal terms. Shearman & Sterling, the law firm representing holders of the $500mn Eurobond due on September 23, said on September 17 they can now thwart the 20% write-down and other terms.

The group is seeking to change the allocation of the new securities so that its payments are delayed for approximately four years. According to previous media reports, the amount outstanding of the two shortest Eurobonds is $1.17bn, or 6.5% of the total sovereign Eurobonds that were to be restructured.

Shearman & Sterling insists that all bondholders should get identical packages of the new bonds. But the group holding the shortest-dated bonds consider this unfair as it would defer the average maturity by more than eight years for the bonds due in 2015 and only half a year for those due in 2023.

According to previous media reports, bondholders must be given at least 21 days notice before a vote can be called, and 75% of the investors need to vote in favour at a meeting at which two-thirds of the creditors are represented. The Franklin Templeton group also has a blocking stake in the September 23 note.

IMF call for support

Meanwhile, Christine Lagarde, the Managing Director of the International Monetary Fund (IMF), called all creditors to support the terms of debt restructuring deal, secured by Ukraine with the committee headed by Franklin Templeton.

“High participation by all concerned Eurobond holders in the upcoming debt exchange is paramount, since Ukraine lacks the resources under the program to service its debts on the original terms. Together with the authorities and the ad-hoc creditors' committee, I call on all creditors to support this offer," Lagarde said in a statement published on September 22.

Lagarde added that while "fully aware of the challenges ahead, the Ukrainian authorities' strong start in implementing their economic programme [agreed with the IMF and other international donors] has reaffirmed their determination to address the economic imbalances and deepen structural reforms in order to put the economy "on a path of sustained growth and financial stability".

According to the IMF chief, the economic reforms programme is receiving "exceptional financing" from international financial institutions and bilateral partners, which has exceeded $10bn so far in 2015, consistent with commitments of more than $25bn for 2015-18.

"In addition to continued support from these international partners, the success of the programme also critically rests on support from Ukraine’s creditors," Lagarde added.