Hedge Funds Prepare for Debt Restructuring Talks with Ukraine Over $2.6 Billion in GDP Warrants

A coalition of hedge funds with investments in Ukraine, including Aurelius Capital Management and VR Capital Group, is preparing for debt-restructuring talks with the Ukrainian government to renegotiate approximately $2.6 billion in GDP-linked warrants, according to a Bloomberg report.

Sources familiar with the matter confirmed that the creditor group is seeking legal counsel from Cleary Gottlieb Steen & Hamilton as they look to address the restructuring of these warrants. This development comes ahead of Ukraine’s impending payment obligations to warrant holders in August, including a consent fee and a payment for the 2021 period. The GDP warrants were issued as part of a 2015 debt restructuring deal and are tied to Ukraine’s economic performance. Notably, these warrants were excluded from a recent $20 billion bond restructuring agreement between Ukraine and its international bondholders.

Neither the Ukrainian finance ministry, Cleary Gottlieb, Aurelius, nor VR Capital have provided public comments on the ongoing discussions. However, the Ukrainian finance ministry has stated its intention to treat warrant holders equitably in any future liability management proposals. The ministry also confirmed it will pay the consent fee on 1 August, alongside a deferred payment of approximately $250 million.

The GDP warrants, which mature in 2041, have been trading at around 58 cents on the dollar, nearing their highest value since Russia’s full-scale invasion of Ukraine in 2022. As part of the war effort, Ukraine’s international bondholders agreed to a two-year moratorium on debt payments, which is set to expire next month. This moratorium was designed to provide financial relief to Ukraine during its ongoing conflict with Russia.

The hedge funds’ decision to join forces followed indications from Ukrainian officials in early July that the GDP warrants should be included in upcoming debt restructuring efforts. Morgan Stanley strategist Simon Waever speculated that these warrants could be exchanged for bonds in the coming months, benefiting from their current exclusion from broader restructuring and the confirmed payments in August.

A separate creditor committee, consisting of firms like Amundi, BlackRock, and Amia Capital, negotiated a bond restructuring deal that covered about 25% of Ukraine’s international bonds. It remains unclear whether this group will be involved in the negotiations for the GDP warrants.

As part of the bond restructuring agreement, a crucial cross-default clause was removed, which had previously risked triggering defaults across other instruments if one were to default. This removal has simplified the restructuring process, making it easier for the Ukrainian government and creditors to address the country’s mounting debt obligations.