Mark Weidemaier, Ugo Panizza and Mitu Gulati are faculty at the University of North Carolina (law), the University of Virginia (law) and the Geneva Institute (international economics), respectively.
About a month ago there was an announcement that a bondholder group had formed for the Ukrainian state-owned power company, Ukrenergo. The bond was guaranteed by the Ukrainian sovereign, and the core of the announcement was this (Alphaville’s emphasis below):
The Group wishes to make clear from the outset that, for the Group to support any restructuring or liability management transaction in relation to the Notes, such restructuring or transaction must deal with the Company’s indebtedness on a standalone basis and not as part of any contemplated restructuring of Ukraine’s sovereign indebtedness.
That’s well and good — of course, the holders of every bond want special treatment. But here’s the bit that got us and others interested. Upon the announcement, the market price of these bonds shot up roughly 30 per cent over the sovereign’s own bonds. That premium has since gone down, but the Ukrenergo still trades at about a 15 per cent premium over a comparable sovereign bond.
What the hell? What information was in the announcement that got the market so excited? We see no obvious explanation so, as we enjoy doing from time to time, we speculate.
First, some background. In July 2022, a few months after the onset of war with Russia, maturities for this bond and others issued by Ukraine were consensually extended until November 2024. Perhaps the hope was that the war would be over by late 2024. Going by the relative market prices of the Ukrenergo and Ukrainian sovereign bonds, everyone seems to have assumed at the time that this bond would be restructured on the same terms as other Ukrainian sovereign credits in any future postwar debt workout.
One might ask why the Ukrenergo bond with a sovereign guarantee would be treated the same as Ukrainian sovereign bonds. It is backed by two entities (the company and the sovereign) whereas vanilla sovereign bonds are backed by only the sovereign. Unless the company is just a bucket of bolts, its creditors should get more in a restructuring.
A possible answer is that the Ukrenergo bond has an “ aggregated ” collective action clause (CAC), which allows key terms like payment obligations to be modified in an aggregated vote of all holders of bonds with similar CACs. The threshold for such a modification is 75 per cent. At $825mn the Ukrenergo bond is relatively small — dwarfed by $20bn worth of Ukrainian bonds with aggregated CACs. The latter group can stick Ukrenergo bondholders with whatever treatment they accept for themselves. And that will be dictated by estimations by the IMF and others about how much postwar debt relief Ukraine will need.
In the midst of all this, why would this little Ukrenergo bond expect special treatment? Some wild speculations follow.
Since we study contract provisions, our first assumption tends to be that a lawyer for creditors found an advantage in the bond documents. Or at least, some wonky language that might be plausibly argued to suggest the guarantee is stronger than realised. But we struggle to find anything in the Ukrenergo bond that offers bondholders special protection.
The Ukrenergo bond can be aggregated with all the others as long as its CAC has substantially the same terms as the others. And as best we can tell it is almost identical, except for referring to the guarantee. So it looks like these investors can be forced to vote along with the much larger group of Ukrainian sovereign bondholders.
And while the guaranteed bond has some confusing language — such as saying that the sovereign guarantor’s obligations will not be affected by a modification to the Ukrenergo bond — the sovereign is only on the hook for “all amounts payable by the issuer.” So, if those amounts are reduced via the CAC, so is the amount the sovereign must pay.
Could it be possible that bondholders want to get rid of the guarantee — perhaps believing that this will take them outside the umbrella of sovereign obligations that will have to be restructured?
Ukrenergo is hardly a thriving company. But perhaps it, like some other Ukrainian companies, benefits from some of the subsidies provided by European governments and the US, which understand the importance of keeping the lights on in Ukraine.
And perhaps holders of the Ukrenergo bond think the sovereign will allow them to escape the restructuring if they let it off the hook on the guarantee. It would improve the sovereign’s balance sheet a bit to remove the guarantee obligation.
But really? Is that enough for the sovereign to let these bonds escape?
As an aside, we note that bond prices for Ukraine’s state-owned railways also trade at a hefty premium over the sovereign’s bonds. As with the sovereign bonds, payments on these bonds were also postponed for two years in late 2022.
Are the railways a good enough company to justify the pricing premium over Ukraine’s sovereign bonds? Have these state-owned companies somehow become profit machines during the war? Or is this pricing weirdness a function of bondholders hoping to get paid out of subsidies from the Europeans and Americans? ( here and here )
If we are right in our wild speculations that these companies look good because they benefit from war subsidies, surely the subsidy providers will not be pleased to see their money passed on to holders of the Ukrenergo bonds. (Since we enjoy speculation, we picture the bondholder premia resulting from grabbing a share of the war subsidies being used to build a new wing on to someone’s mansion in the Hamptons.)
And if it will piss off the donors, can Ukraine really intend to play along? It needs every penny for defence and, later, reconstruction. There is something black in the lentils, as Mitu’s mom would say. No other moms could be reached for comment.