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By Sujata Rao
LONDON, June 11 (Reuters) - Ukraine can’t meet IMF terms for a bailout unless creditors write down 40 percent of the sovereign bonds they hold, a source said on Thursday in comments that suggest talks are deadlocked.
Finance Minister Natalia Yaresko suggested the 40 percent writedown, or haircut, on the bonds earmarked for restructuring during a visit to Washington on Wednesday.
A source familiar with the discussions and close to the Finance Ministry told Reuters: “The ministry has calculated that a 40 percent haircut is needed to hit IMF targets.”
But a source close to the bondholder committee described as factually incorrect any suggestion that only a large principal haircut would allow Kiev to meet the IMF targets.
“The IMF requirements do not include, nor necessitate, a haircut,” the source close to the committee told Reuters.
The committee, led by Franklin Templeton and represented by Blackstone, has ruled out taking a haircut. Bondholders say a restructuring plan they proposed will enable Ukraine to fulfill the three main targets set out by the International Monetary Fund as part of a $40 billion bailout.
They say the plan, which would draw on central bank reserves, can save Ukraine $15.8 billion over a four-year period via maturity extensions and interest payment reductions. But Kiev has rejected the idea, objecting to using the reserves for this purpose.
Instead it is threatening to stop payments altogether.
During a trip to Washington this week to meet with the IMF, Yaresko gave a number of media briefings, warning at one point that Ukraine may be forced to call a moratorium on foreign debt payments if restructuring talks drag on into the summer.
The creditor committee, which has accused Kiev of a lack of engagement in negotiations, said: “Minister Yaresko has been in possession of a detailed IMF-compliant solution from the bond committee for over a month.”
Its e-mailed statement said: “We are deeply concerned about the stance the Minister is taking, which is not in the interests of Ukraine. We are ready and willing to start talks at any time.”
Bond prices fell sharply across the curve between 1.5 to 2.5 cents in the dollar .
They may have further to go, according to Jakob Christensen, a strategist at Exotix.
A 40 percent haircut, accompanied by a possible 10-year maturity extension and a 6 percent average coupon, would mean an exit yield of 12 percent, Christensen says, referring to the market’s forecast of the bonds’ value after restructuring.
The higher the exit yield, the lower investors’ assessment of the value of new bonds issued in place of old debt.
In such a scenario, net present value (NPV), a measure of the worth of future bond interest payments in current terms, would be between 38 and 43 cents in the dollar, said Jakob Christensen, a strategist at Exotix. He reckons the bonds, currently trading between 47 and 55 cents, are overvalued.
But he added: “It’s a negotiation process. Ukraine will come out hard and then seek a compromise. I think (this is) an initial proposal in order to arrive at a 25 percent principal reduction.”
Yaresko says she is sure Ukraine will receive $1.7 billion in a second tranche of credit from the IMF in July even if no deal is reached with creditors by then.
However, next week Kiev will need to stump up around $70 million for a coupon payment on June 20 to Russia, which holds a $3 billion bond maturing in December.
Crunch time may come in September when a $500 million bond matures: most reckon Ukraine will not make that payment. (Additional reporting by Karin Strohecker and Alessandra Prentice; Editing by Ruth Pitchford)