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London-based hedge fund VR Capital is part of a group of bondholders pushing for Ukraine’s state grid operator to be excluded from the country’s looming debt restructuring, as creditors start to take a tougher stance after a two-year reprieve on repayments in the wake of Russia’s invasion.
The firm, a longtime investor in Ukraine, is a member of a group that is asking Ukrenergo to deal with its creditors outside of a debt relief plan that President Volodymyr Zelenskyy’s government will soon pitch to holders of about $20bn of foreign currency bonds, said people familiar with the matter.
The proposal centres on a state-guaranteed $825mn green bond sold by the power company before Russia’s 2022 full-scale invasion. The group is making the request as it does not want holders of the sovereign bonds to override any deal on restructuring this debt.
The stance taken by VR, which is headed by Richard Deitz, a co-founder of investment bank Renaissance Capital, and others also shows how a wartime standstill on payments that was granted to Ukraine for the past two years is now giving way to more complex negotiations.
The bondholder group is not opposing debt relief for Ukrenergo, but it said in February that the company should deal with creditors “on a standalone basis and not as part of any contemplated restructuring of Ukraine’s sovereign indebtedness”.
People familiar with the group’s position said Ukrenergo’s underlying assets favour a separate approach. The company’s substations have been less affected by a wave of Russian attacks than larger power plants, which are run by independent operators, they said.
The people also pointed to legal wording in the green bonds’ documentation that they say appears to remove it from the collective bondholder votes that Ukraine would use to sweep creditors into a sovereign restructuring. The creditor group is in contact with holders of more than half of the bond, they added.
“Why should it be that creditors of the sovereign who have no relationship to Ukrenergo have the right to alter the contract between Ukrenergo and its creditors,” one of the people said.
The group is also advocating separate treatment for Ukrenergo because its bond’s next interest payment in effect does not fall until May next year, long after the deadline for a sovereign restructuring, the people said.
VR Capital declined to comment. Ukrenergo also declined to comment.
Holders of Ukraine’s sovereign bonds have formed a committee as Ukraine has said it plans to secure a restructuring by the middle of this year, in time to replace the two-year moratorium that expires in August. The IMF has said a debt deal is needed to help finance Kyiv in the next few years.
Ukraine’s finance ministry declined to comment on the Ukrenergo creditor proposal.
Ukraine’s bonds are trading at about 25-30 cents on the dollar. The Ukrenergo bond has risen from 18 cents on the dollar a year ago to about 36 cents.
If the government takes up the Ukrenergo creditor group on its proposal, it could open the door to a higher recovery on the debt than would apply across the sovereign debt restructuring, according to analysts and investors not involved in the trade.
But they cautioned that this would still be a highly uncertain bet on Ukrenergo’s ability to repay creditors, depending on factors such as its exposure to war damage and access to dollars.
Russian strikes have caused an estimated $9bn worth of damage to Ukraine’s energy sector overall, according to analysis by the Kyiv School of Economics. Estimated damage to Ukrenergo assets was $2bn of this total as of the start of this year, the KSE added.
Olga Slyvynska, head of international relations at the KSE, said it was “theoretically possible” to exclude the Ukrenergo debt from the sovereign restructuring. “But it will mean the company will need to service the debt on its own,” she added.
The power company has secured hundreds of millions of dollars in emergency loans from the European Bank for Reconstruction and Development to fix electricity infrastructure hit by Russian bombs. The EBRD also invested in part of the green bond before the war.
“There is no question of EBRD cash going to bondholders,” said a person familiar with VR Capital’s position on the debt. “There is no unwillingness from bondholders to have a sensible and serious discussion with the company and its shareholder about a restructuring,” they added.
Investors and analysts have pointed to a possible precedent. When Ukraine included critical state-owned companies in its previous debt restructuring in 2014-15, after the crisis over Russia’s seizure of Crimea, they dealt with creditors separately.
Despite the extensive destruction wrought on Ukraine’s industrial base over the past two years by the biggest conflict in Europe since the second world war, many Ukrainian state and private companies have been able to keep creditors on side, often through intricate deals to service some debts and extend others.
Naftogaz, the state gas company, restructured foreign currency bonds and exited default last year after negotiations in which VR Capital played an integral role as a significant holder. The company has said it plans to keep servicing this debt despite the sovereign restructuring.
