As Ukraine Launches A Debt Restructuring, Is Russia About To Become A "Holdout" Activist Investor?

With Argentina suddenly no longer able to kick the can any longer in its decade long fight with holdout investors, and warning that unless the covenants of the foreign law bonds are stripped in effect making them local-law bonds (and undergoing an event of default for CDS purposes), everyone is focusing on how soon until the sovereign default parade will again resume, following the Greek technical bankruptcy two years ago. Yet the next sovereign restructuring may not come from Argentina first, but from the Ukraine, which as Reuters reports is holding talks with creditors on the restructuring of its foreign debt. Unfortunately for the country, this attempt at a "voluntary" restructuring is coming at the worst possible time.

From Reuters:

Ukraine is holding talks with creditors on restructuring its foreign currency debts, an official from an international finance association said on Thursday following recent meetings with Ukrainian officials.


Lubomir Mitov, an economist with the Institute of International Finance, said that while Ukraine's finances were precarious, it was too soon to say whether it would need to change the terms of its debt.


Mitov said Ukrainian officials stressed they would avoid forcing any so-called haircuts on bondholders in a restructuring.

Taking a page from the Greek playbook, Ukraine is fixated on making it quite clear that creditors would be, make that should be, unanimous in agreening to a restructuring. Which is clear: as the endless days of Greek bondholder negotiations taught us, the inability to have the vast majority of holders agree on a change in bond terms, i.e., a restructuring, would mean an event of default.

"The Ukrainians authorities made very clear to us that they would consider this only as a really, truly voluntary operation agreed by the bondholders," Mitov told journalists by phone. "A voluntary exchange or maturity extension could be one of the sources for financing."

Basically, the only question is whether the restructuring of insolvent Ukraine which has lost its industrial eastern regions to "separatists" and is no longer capable of servicing its existing debt, takes place during a sovereign default or without one, allowing the country to seamless continue its existence as if it was the country that issued the original bond, under the original conditions (hint: it isn't).

Alas, this attempt to renegotiate its bonds comes at the worst possible time because just this week the US Supreme Court gave a green light to "voluntary" exchange offer holdouts everywhere to demand priority treatment when holding out from to such "enforced" exchange offers as what Argentina did back then... and what Ukraine is trying to do now.

So absent some major "carrot", most likely coming from Uncle Sam, we wouldn't be surprised if Ukraine was unable to find even a simple majority of participants that would agree to the terms of its exchange offer.

Which leads to another question: which will be the fulcrum Ukraine security, and who will be the vulture investors - here the usual suspect Elliott comes to mind - preparing to "hold out" and scuttle the deal, demanding a pound of flesh in exchange for not holding out.

For now the answer is unclear, which is why once the Reuters news hit, Ukraine bonds tumbled:

But what will make the Ukraine restructuring fascinating is if the "activist" bondholder investors, aka vultures, aka holdouts, are not your usual hedge funds, but none other than the Kremlin, which after accumulating a sufficient stake to scuttle any prenegotiated, voluntary transaction can demand virtually anything from Kiev in order to allow the country to make the required adjustments on its bonds to avoid an outright sovereign default.

Because who else can't wait for Putin Capital Management LP?