After Ukraine failed to reach an agreement to restructure $2.6bn of debt tied to economic performance in April 2025, both itself and its warrant holders must now seriously evaluate the product’s viability and how to move forward.
Ukraine was one of several debt management offices represented along with multilateral development banks and asset managers at OMFIF’s annual global sovereign debt forum on 13 May in London. The forum discussed key issues facing borrowers including navigating volatile markets and uncertainty as well as the outlook for the economy and global sovereign debt.
Back in 2015, Ukraine sold gross domestic product-linked warrants to investors as part of a restructuring deal, which saw bondholders writing off 20% of their debt. These GDP warrants are complex securities where there are no coupons or a principal but payments tied to economic performance – which kicks in after annual GDP exceeds a certain percentage. As Ukraine’s GDP grew by 5.3% in 2023, that has meant Ukraine owing a substantial sum to holders of its warrants at the end of May.
However, Ukraine argues that these warrants are not suitable for the current situation, where a war led to a 30% economic contraction in 2022. Ukraine says the growth in 2023 is not a sign of prosperity, but rather a fragile rebound from a severe economic downturn. As a result, it should not be prompted to make a payout of almost $600m due at the end of the month.
Ukraine wants to find a comprehensive solution and has laid out its proposals with two options. These are to either exchange these warrants for conventional bonds, or to cancel payments linked to the warrants through 2028 in exchange for additional bonds and an extension until May 2029 of a call option to allow Ukraine to buy back the warrants.
These talks mark a crucial moment for Ukraine’s dialogue with investors and restructuring of its debt since the war, which began with a two-year standstill on debt payments in the summer of 2022.
A market participant at the forum commended the ‘transparency and relationship’ with investors that Ukraine has built on since the war. ‘That’s really stood out and helped Ukraine,’ he added.
Diversification strategies
The forum also explored the importance of diversification, with a head of a sovereign DMO discussing its re-entrance into the Swiss franc bond market and the introduction of its retail bond programme as key areas of diversifying its investor base.
‘Last year, as part of our diversification programme, we did a very successful transaction in the Swiss market,’ said the head of the DMO, which was the sovereign’s first in this market for over 10 years. The Swiss market is a key one for issuers to target, given they are buy-and-hold investors offering stability.
Meanwhile, the sovereign’s launch of its retail bond programme offers another key pocket of diversification to individual citizens of the country. ‘We were positively surprised, because we sold out all the bonds within four days only,’ said the DMO head, who explained that the original target was to issue €300m but it ended up selling $500m.
Retail government bonds have become a hot commodity in Europe in recent years in response to higher yields and offer a key way for sovereigns to not just broaden their investor base but encourage individuals to save and invest in their local economy. ‘More broadly, retail mobilises sticky money and if you’re actually mobilising domestic savings that can be used, it has really positive macro spillovers as well,’ said a market participant at the forum.
Strength of sukuk
The outlook for the sukuk market was also explored at the forum, with market participants discussing how it is becoming a mainstream instrument in capital markets. A sukuk is an Islamic finance security where there are no interest payments but rather returns from the asset’s performance.
‘Investor participations are increasing year on year, and investors are becoming more aware about the senior unsecured natures of sukuks,’ said a capital markets official at an issuer.
The sukuk market is also notable for its strength and safe-haven status in capital markets. ‘When the markets reopened in late April, one of the first issuers back was Bahrain, a single-B issuer, but it could do a sukuk,’ said a market participant. ‘At the same time, Egypt could do a sukuk and Turkey could do a sukuk, but they couldn’t do a conventional bond,’ he added.
Burhan Khadbai is Head of Content at Sovereign Debt Institute.
Join OMFIF on 6 September at the European sovereign, supranational and agency forum to reflect on the issuance environment for the region.
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