(Bloomberg) -- A group of hedge funds invested in Ukraine is organizing ahead of debt-restructuring talks with the government to rework some $2.6 billion of GDP warrants, according to people with knowledge of the matter.
Funds including Aurelius Capital Management LP and VR Capital Group are part of the creditor group advised by Cleary Gottlieb Steen & Hamilton LLP, the people said, asking not to be named because the information isn’t public. Absent a restructuring deal, the cash-strapped government of Ukraine would be due to make two payments to warrant holders in August — a consent fee and a payment covering the 2021 period, two of the people said.
The warrants have disbursements linked to Ukraine’s economic performance, providing creditors with payments if gross domestic product expansion exceeds certain levels. They were issued as a sweetener during a previous debt revamp in 2015, but were excluded from a recent $20 billion bond restructuring agreement in principle between holders of Ukraine’s international bonds and the government.
A spokesperson for Cleary Gottlieb didn’t respond to a request for comment. Aurelius and VR Capital didn’t immediately respond to requests for comment. A spokesperson for Ukraine’s finance ministry also didn’t comment on the matter.
The finance ministry had said in a statement on Monday that it would “commit to ensure the fair and equitable treatment of holders of the warrants in any prospective future liability management or other treatment proposal.” It said it intended to pay the consent fee on Aug. 1 as well as a deferred payment on the notes, which combined would amount to about a quarter of a billion dollars.
The warrants, which mature in 2041, traded at about 58 cents on the dollar on Wednesday, near the highest since Russia’s full-scale invasion of Ukraine in 2022. In the wake of the invasion, Ukraine’s international bondholders agreed to a two-year moratorium on debt payments, which expires next month, to relieve some of Ukraine’s financial pressures while it was at war.
The warrant holders’ move to organize comes after Ukrainian officials told international creditors on an investor call in early July that the instruments would need to be part of a debt restructuring.
“The GDP warrants benefitted by being left out and also seeing the two payments in August confirmed,” Simon Waever, a strategist at Morgan Stanley, wrote in a note. “The most likely scenario remains an exchange into bonds in the coming months.”
The agreement on the separate restructuring of the international bonds was reached with a creditor committee that included Amundi SA, BlackRock Inc and Amia Capital LLP, as well as other investors, who together represent around 25% of the bonds. It is unclear whether this group or some of its members would remain together to negotiate the restructuring of warrants as well.
In the bond restructuring, the parties did agree on removing a so-called cross default clause between the international bonds and warrants. A cross-default clause means default on one instrument carries over and can be considered default on others.
--With assistance from Giulia Morpurgo and Irene García Pérez.
(Updates with Morgan Stanley comment in eighth paragraph.)
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