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. Last Updated: 07/27/2016

Standard & Poor's Says Kiev in Default




KIEV -- The international rating agency Standard & Poor's has declared it considers the Ukrainian government in default on its domestic debt, but Ukrainian officials angrily denied this Friday, saying the debt restructuring deal they offered was fair to investors.


"There are no grounds on which to view the situation as default," said Valery Lytvytsky, an aide to President Leonid Kuchma on economic issues.


"The government and the Finance Ministry are holding talks on the voluntary exchange of the short-term paper," he said. "This process has not been completed and already around 75 percent of nonresidents have agreed to conversion."


Analysts say that Ukraine, struggling to shift a mountain of short-term domestic debt, has made herculean efforts to give the best terms possible, at least to foreign investors, under a voluntary deal to convert treasury bills to longer bonds.


The country also has offered a voluntary plan for domestic banks to roll over their short-term treasury bill holdings into debt maturing in up to 66 months.


The government stresses the programs are voluntary, but Standard and Poor's said Thursday that its definition of default included offering investors less attractive conditions for reconstructed debt than for maturing debt.


Ukraine is offering local banks annual hryvna yields on the new bonds of 40 percent, compared with primary market yields of 60 percent before the restructuring started.


It is also offering dollar Eurobonds priced to yield 20 percent in dollars, compared with market yields several times that level for existing Eurobonds.


The head of the National Bank Governor's advisers group, Viktor Lysytsky, disagreed with the definition.


"The agreements with the investors were reviewed on a voluntary basis before they expired. Not a single investor would say that he was rudely refused repayment," Lysytsky said.


But some investors who declined the swap deal may be wondering whether or not they can repatriate their redeemed funds.


A government statement said Thursday that Ukraine had paid 198.9 million hryvnas ($61 million) Tuesday to redeem nine-month special issue treasury bills placed via investment bank Merrill Lynch last December.


The statement gave investors a number of options for using the redeemed hryvnas in Ukraine and said nothing about converting the hryvnas to dollars, which a source close to the deal said was provided for under government regulations of the bonds.


"There's a resolution that specifies that at maturity of these bonds the National Bank of Ukraine will convert them to U.S. dollars, but this did not take place," the source said. "Some people bet that the government was going to pay dollars and they did not ? and foreign investors have been waiting for clarification on what they can do with this money for two days. It's a very unfortunate situation."


Ukraine says it has redeemed all of the Merrill Lynch bills maturing on Tuesday that had not previously been tendered for exchange under the restructuring offer, accepted all conversion applications submitted and extended until Oct. 2 the deadline for the remaining investors to take up the restructuring plan.


"Default is the fact of nonpayment," said Vyacheslav Kozak, adviser to Prime Minister Serhiy Tyhypko. "There was nothing of the sort in Ukraine. We are fulfilling our current obligations."