LONDON (Reuters) - Ukraine, seeking to plug a $15 billion (10 billion pounds)-plus funding gap via debt restructuring, may find that a multi-year payment moratorium does the trick, with investors possibly having to swallow a smaller eventual writedown than feared.
The country has received the nod from the International Monetary Fund (IMF) for a $17.5 billion loan package, and the fund assumes Kiev will get $15.4 billion from talks with creditors.
Right now Ukrainian bonds, with the exception of a $3 billion chunk held by Russia and a $1 billion U.S.-guaranteed issue, are trading at less than half their face value, a reflection of what creditors fear they will have to swallow as a writedown, or haircut, on their initial investments.
With total debt likely close to or over 100 percent of gross domestic product, reserves that can buy just a month's imports, a fragile ceasefire in the east of the country and a chunk of territory (Crimea) annexed by Russia, some players reckon a haircut of up to 70 percent is possible
But some are starting to speculate that pushing back debt payments over the four-year life of the IMF loan may give the country what it needs. It could do this either by extending maturities or by stopping payments for a while with bondholders' agreement, through a moratorium.
"You know Ukraine's debt is unsustainable but you don't know how unsustainable," said Gabriel Sterne, head of global macro at Oxford Economics. "What would make sense in this very tight liquidity situation is a complete moratorium, calling a stop to all payments for a period."
That would be an amended version of reprofiling, or pushing back bond maturities, and would give Ukraine breathing space while it figures out what resources it has. Pushing back debt repayments for four years should provide Ukraine with a $15 billion cushion, the Institute of International Finance said last month.
In such a situation, easing short-term debt payment pain can improve solvency while a longer-term restructuring is then agreed. In the most optimistic scenario, a significant haircut may not be needed at the end of the grace period.
Ukraine has set itself a June deadline to conclude the restructuring, an ambitious timetable because one creditor, Franklin Templeton, holds around $6.5 billion of outstanding Eurobonds, Exotix strategist Jakob Christensen notes.
Greece's restructuring after it was first floated in 2011 took four months, but Ukraine has the added complication of Russia, which has already said it will not restructure its $3 billion.
But negotiating a reprofiling that could possibly include a grace period and maturity extensions of up to 10 years, could be concluded relatively quickly, Christensen said, advising clients to hold on to Ukraine's 2015, 2017 and 2023 dollar bonds.
The bonds have rallied this week after ratings agency Fitch told Bloomberg that Ukraine bondholders may escape a full-fledged restructuring.
And if bondholders would benefit, so would Ukraine, many argue, citing Kiev's standing with the global investor community and its hopes to eventually return to bond markets. Deutsche Bank economist Robert Burgess says Ukraine would need to bear in mind that aggressive restructuring carried long-term costs.
IMF research has found sovereign spreads returned to pre-crisis levels faster after reprofiling exercises, compared to when the face value of bonds was cut, while the time taken to regain market access was also shorter, Burgess noted.
"There is a potential cost and the question is whether the cost is bigger than the benefit," he said. "It's a thin line."
Additional reporting by Marc Jones and Chris Vellacott in London; Editing by Mark Trevelyan and Toby Chopra