Aurelius Reportedly Long Ukrainian Sovereign Debt, Pushing For Better Restructuring Terms

Sep 18 2015 | 1:41pm ET

By Sujata Rao and Chris Spink (Reuters/IFR) - A hedge fund that has for years used courts to secure better debt repayment terms from Argentina has accumulated Ukraine sovereign bonds and formed a group seeking improvements to a recent debt workout, a source with knowledge of the matter said.

Reviled by Argentina and debt forgiveness groups as "vultures", Aurelius Capital Management and another hedge fund, Elliott, have long pressed Buenos Aires for full repayment on its sovereign debt, including the seizing of national assets, and last year triggered a fresh default.

The source said Aurelius had been buying Ukrainian bonds including some that mature in the remaining months of 2015. The bonds plunged in price to lows of around 35 cents in the dollar earlier in the year when an unilateral default looked probable but are now trading at around 78 cents.

"It's Aurelius. They have been accumulating the bonds from the market," the source said, requesting anonymity.

A restructuring deal agreed in August allows Ukraine to cut principal repayments on its bonds by 20 percent and to extend their maturities by four years, in what are widely seen as favorable terms for bondholders.

Ukraine needs a deal with its creditors to secure International Monetary Fund aid after years of economic mismanagement, corruption and a conflict with pro-Russian separatists brought the country to near bankruptcy.

But some holders of Eurobonds maturing this year say the restructuring in its current form is unfair because it would defer the average maturity of their debt by more than eight years but only by half a year for bonds due in 2023.

The group said on Thursday through law firm Shearman & Sterling that its stake is big enough to allow it to challenge a pending vote on the $18 billion debt deal.

Shearman & Sterling said it could not reveal its client's identity. A spokesman for Aurelius declined comment.

The development might delay the restructuring, which Ukraine hopes will be completed by end-October. But the source said: "They can't torpedo the deal, that's not going to happen, the rest of the restructuring will just go ahead

"They'll end up joining Russia as a holdout," the source added.

NO CROSS-DEFAULT

A creditor committee comprising Franklin Templeton, T Rowe Price, TCW and BTG Pactual holds $8.9 billion of the $18 billion being restructured but a 75 percent majority of holders in each bond must back the deal.

Ukraine's bonds do not have cross-default clauses, however, meaning holders of one bond cannot sink the entire restructuring deal if those holding other issues vote in favor of the swap.

Nevertheless, it will be difficult for Ukraine to accept the Shearman & Sterling group's request because it is bound by the deal to treat all bondholders equally. Giving special terms to this group could have repercussions in its dealings with Russia, which holds $3 billion of Ukrainian Eurobonds maturing in December, said the source.

Russia has refused to participate in the restructuring but Kiev says it cannot pay the bonds held by Russia in full.

A spokesman for the Ukrainian government said he could not comment at this stage.

If Aurelius also refuses to take part, the bonds it holds will remain in default, potentially allowing the hedge fund to chase Ukraine in courts in London and elsewhere.

"That bond will remain out there like some of the Argentine debt ... Ukraine will remain in default," Nomura strategist Tim Ash said, although he noted that Ukraine had fewer assets than Argentina for hedge funds to seize.

Ultimately, however, the 40 cent jump in price for Ukraine's bonds since August 20 means there may be little incentive for investors to dig in their heels in pursuit of a better deal.

"The whole curve has benefited from the fact that the big bondholders stuck together, the bonds are up 40 cents so do you really want to hold up the thing for another 5 cents?" Ash said.


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