Morrow Sodali proud to play key role in Ukraine’s debt deferral success
When the Ukrainian government needed to approach its foreign creditors for space to repay billions of dollars in debt, it assembled a multinational team of leading financial and legal professionals to oversee the complex process and ensuring that all moving parts have come together successfully and on time. .
Managing the negotiations between a war-torn country and thousands of investors scattered across many different countries and time zones was not easy, but the task force comprised of the Ukrainian government and its agents and advisers benefited from using the new BondWatch system to monitor in real time – timing the instructions they received from bondholders and identifying when the required consents were obtained on each series of bonds.
This unique real-time reporting system was developed by the Global Debt Services team at investor engagement firm Morrow Sodali, which was responsible for overseeing Ukraine’s debt reprofiling mechanisms, and collecting and disseminating data from multiple sources to provide continuous feedback to all parties. as crucial deadlines approached.
The purpose of the four separate but inter-conditional consent solicitations for which Morrow Sodali was appointed was to extend the maturities of (i) Ukraine’s 13 outstanding Eurobond series, amounting to approximately $20 billion (ii) outstanding GDP-related mandates amounting to approximately US$3.2 billion, and (iii) two series of outstanding Eurobonds issued by Ukrenergo and Ukravtodor (Ukrainian national agencies responsible respectively power transmission and roads) guaranteed by Ukraine and amounting to approximately US$1.5 billion.
The holders of approximately 75% of the total principal amount of the 13 series of outstanding Ukrainian Eurobonds have given their consent to the modification of the terms of the bonds (at least two thirds of the total principal amount of the outstanding bonds being required to proposed changes). In addition, each series of Euro Sovereign Bonds received more than 50% consents to change the terms, in accordance with the applicable consent requirements.
Meanwhile, holders of approximately 93% of the notional amount of GDP warrants outstanding participated in the consent solicitation, 91% of whom voted in favor of the proposed amendments.
The task force for the deal included investment bank JP Morgan as solicitation agent, Rothschild & Co as financial advisor, and law firms White & Case LLP and Avellum. Thanks to the combined efforts of all parties involved, the intense three-week negotiations were successfully concluded, resulting in the extension of due dates and the deferral of interest on some $25 billion in debt.
The financial aid is welcome news for Ukraine, where Europe’s biggest land dispute since World War II has destroyed vital infrastructure, shut down swaths of the country’s economy and depleted foreign currency reserves.
As the Ukrainian government stated in the official announcement of the consent solicitation: “The Russian invasion… poses extraordinary risks to the economic, financial and social fabric of Ukraine and to its territorial integrity. Disrupted fiscal cash flows and increased demands on government resources caused by the war created unprecedented liquidity pressures and debt servicing difficulties for the Ukrainian government. It has been an ongoing challenge to find adequate sources of funding for Ukraine to cover critical defence, social and humanitarian costs, and to begin planning for the country’s post-war reconstruction.1
A group of countries including Britain, France, Germany, Japan and the United States had earlier given the go-ahead to Kyiv’s request to defer interest payments on its debt, and they called for d other creditors, including bondholders, to do the same. However, it was far from clear that the reprofiling would obtain the required approvals from the holders of more than 50% of each of the bonds concerned, and at least two-thirds in total.
However, the chances of a successful agreement have been enhanced by the innovative use of “two-member” aggregation under collective action clauses (CACs) contained in the underlying documents governing the bonds ( but not GDP-linked warrants, which had separate terms and procedures).
Bringing together their teams from their offices in the United States, Europe and Asia, Morrow Sodali assumed the role of information and tabulation agent for Ukraine’s consent solicitation. As such, it was up to them to initiate the process by announcing it to the market, thus completing the Solicitor’s role of meeting holders and allowing them to agree to modify the initial issue conditions of the securities. .
In addition to identifying and contacting security holders and their custodian banks and improving their understanding of the proposal, the Information and Tabulation Agent is responsible for collecting their responses, providing calculations and required regulations and to certify the results.
They are also responsible for coordinating and monitoring the progress of the consent request, ensuring a timely flow of information to keep the working group informed, and identifying potential issues as early as possible.
Morrow Sodali’s Global Debt Services team is comprised of seasoned liability management experts who have overseen many similar transactions for multinational corporations, banks and countries such as Argentina, Zambia, Mozambique, Suriname and Greece. However, Damian Watkin, managing director of Morrow Sodali’s London-based Global Debt Services, says that despite the clear goodwill shown by many holders towards Ukraine, working for a client at war has made the job much more difficult than usually.
“Soliciting the consent of bondholders in a consent solicitation involves contacting bondholders through intermediary custodian banks, which hold their clients’ securities, and asking them to consent to proposals made by the bond issuer,” Watkin explains.
“In exchange for accepting these proposals, bondholders usually receive a commission. But given Ukraine’s difficult financial situation, it was imperative to avoid paying such fees, so only bondholders related to GDP were offered a consent fee.
“When there are no fees there is no economic incentive, and custodian banks sometimes tend to be less proactive in conveying the message to their holders, so it was particularly important for us , as an information and tabulation agent, to continue to actively communicate with bondholders and custodians, and to closely monitor the flow of incoming consents.
“This allowed the task force to move the process forward, identifying potential voting shortfalls in time to take corrective action well in advance of voting deadlines.”
Securityholder votes may be processed either electronically or through documents, depending on the requirements of the relevant bond documentation and clearing systems. In Ukraine’s case, both approaches were needed, each posing different challenges, says Pia Gowland, director of global debt services at Morrow Sodali based in the Americas.
“The bonds were held in different clearing systems, namely Euroclear and Clearstream in Europe and DTC in the United States,” says Gowland, referring to financial services companies that streamline global financial markets by settling transactions between buyers and sellers. of titles.
“One of Morrow Sodali’s key roles was to draft the documentation required by these clearinghouses and advise the working group on the best operational procedures for processing consents through them.
“These organizations have very specific requirements that must be met before they will accept to receive electronic instructions from their customers, the custodian banks, and we worked closely with them to ensure they were happy with mechanics of Ukraine’s consent solicitations and would allow votes to be processed electronically by their systems without difficulties or delays.
While bond consents were processed electronically, votes for Ukraine’s GDP-related mandates had to be processed manually. It was especially difficult because they involved a lot of last-minute changes, says Watkin.
“The warrant consents were separate from the rest of the agreement because we weren’t able to process them electronically,” he says. “Operationally, this paper-based process was one of the hardest parts of the puzzle to solve given the time constraints, but we got it through in time.”
Despite the huge sums of money involved in such liability management transactions, access to real-time information for workgroups is still not the norm, and paperwork is not unusual. Bond issuers and their advisors have historically relied on infrequent emails and spreadsheets to monitor the status of deals, which can constantly change as thousands of investors scattered around the world vote by intermediary of a wide range of intermediaries.
Fortunately, Morrow Sodali was able to deploy its secure web-based BondWatch platform, which was developed specifically to handle multi-faceted liability management transactions.
Access to BondWatch provided the entire working group of Ukrainian authorities, banks, lawyers and others involved in the deal with real-time updates around the clock, allowing them to follow progress of the transaction, drill down into details and export data as needed. , says Gowland.
“It’s so important that if a particular bond doesn’t seem to get the required majority, the working group is informed so they know where to focus their energy,” she explains. “BondWatch has enabled Morrow Sodali to provide consistent and timely feedback to everyone.”
Following Ukraine’s successful debt reprofiling, which was concluded in August, global rating agencies raised the war-ravaged nation’s credit rating.
The Ukrainian government thanked everyone involved. “The success of the consent testifies to the willingness of investors to support Ukraine and alleviate a high potential burden of the instrument for the Ukrainian economy during the post-war growth period,” he said. added.2 he said in a statement.