June 12, 2015 / 1:45 PM / 4 years ago

REFILE-With moratorium, Ukraine risks demand for immediate payment on all bonds

(Refiled to correct formatting of link to related story)

By Sujata Rao

LONDON, June 12 (Reuters) - Ukraine’s creditors could invoke clauses allowing them to demand payment of all its bonds at a stroke if Kiev carries out its threat to slap a moratorium on debt payments, a top source familiar with the situation told Reuters.

Bondholders, led by Franklin Templeton, have declared themselves “deeply concerned” with Finance Minister Natalia Yaresko’s threat to call a moratorium on foreign debt payments if restructuring talks drag on into the summer.

Ukraine, which has so far made all required payments, last month passed a law allowing it to halt payments.

A source close to the discussions and familiar with bondholders’ thinking said such a moratorium would constitute a default that allows bondholders to demand immediate repayment of all of Ukraine’s bonds at once, thanks to acceleration and cross-default clauses. These are provisions that put a borrower in default on all debt even if it fails to pay just a single obligation.

“Legally, if Ukraine decides to use the moratorium law and declare one, it’s an event of default and that’s crystal clear. It would be perfectly possible for bondholders to accelerate,” the source said, referring to a demand for immediate payment.

“For default there is a sanction and that is acceleration ... All the bonds cross-default and all can be accelerated. So instead of facing staggered maturities, Ukraine would face all its debt maturities in one go,” the person added.

Next week, Kiev has two coupon payments coming up, and needs to stump up a relatively small sum on June 17 as well as $70 million on June 20 - the latter to Russia, which holds a $3 billion bond maturing in December.

Ukraine is hoping to restructure $23 billion worth of sovereign and sub-sovereign debt maturing between 2015 and 2018 but is locked in a tussle with the creditors’ committee. It insists a 40 percent writedown on bonds’ face value is needed in order to meet the terms of an International Monetary Fund-led bailout.

Creditors counter that a writedown, or haircut, is not necessary, and say a plan they have proposed allows Ukraine to achieve the necessary savings over the four-year period of the bailout.

Ukraine’s bond covenants require holders of only a quarter of the principal amount of outstanding notes to request an acceleration. With Franklin Templeton owning around a third of most sovereign bonds, this process should be straightforward.

“In the event of default caused by a moratorium, creditors would normally accelerate and start the process of implementing their claims. They would start a process to ensure that no other payments came out of the system to anyone other than the bondholders,” the source said.

“This means they can’t pay anyone, this would be hugely damaging to the Ukrainian economy and they would be shut out of the infrastructure of the global financial system.”

The IMF has concluded a review prior to the release of the next tranche of its $17.5 billion loan to Ukraine and Yaresko said she expected to receive this in July even in the absence of a deal with bondholders.

The IMF too has hinted it might continue lending to Ukraine even if it is in arrears to private sector creditors. But the creditors say default and arbitrarily imposing haircuts could lock Kiev out of capital markets for a long time.

The source noted that raising cash via bonds was a pillar of the IMF-led rescue programme for Ukraine, with the fund foreseeing Kiev’s return to bond markets by late-2017.

“While Ukraine is in default there is no prospect of access to capital markets,” the person added. (Reporting by Sujata Rao; Editing by Ruth Pitchford)

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