Experts of international investment banks have assessed the agreement between Ukraine and the Ad Hoc Committee of Creditors as the only tactical success of the Ukrainian authorities, however it still leaves many issuers in a vulnerable position regarding the implementation of the deal and the stability of the country's economy and its debts in general.

INSTANTANEOUS GAIN

Morgan Stanley analyst Alina Sliusarchuk said that the deal is less favorable for Ukraine than expected by the government and the market. The 4-year maturity extension is the minimum required to contribute to the first target of reaching $15.3 billion of cash savings throughout the IMF program.

"We think Ukraine will face challenging repayments after the IMF program period with about $5 billion coming due annually on average between the restructured bonds and the IMF," she said.

The expert said that Morgan Stanley thinks political considerations played a role in the negotiations, as the government is under pressure prior to the October 25 local elections.

"With $500 million bonds maturing on September 23, if the agreement had not been reached by then, we would have expected the government to announce a moratorium on its debt repayments. The default news could have led to a panic reaction of the population and further uncontrolled FX depreciation. While any major FX shock would be detrimental for debt sustainability, the default would also have meant an even lower business sentiment, more difficult access to international finance and a delayed economic recovery," she said.

According to Sberbank CIB analyst Alexander Golynskiy, the restructuring provides Ukraine with four years of private sector debt relief.

"However, we see risks after this in high coupon payments and short duration among the new bonds, along with uncertainties related to the eurobonds sold to Russia. As for the private creditors, the proposed terms are compelling, and we do not expect considerable difficulties in receiving bondholder approvals," he said.

Senior Economist of Dragon Capital Olena Belan said that another risk is the possible growth of the burden on the national budget due to payments on GDP warrants if the economic situation sharply worsens after 2025.

"Based on our provisional GDP growth scenario analysis, the VRI’s burden on the state budget should not exceed 1% of GDP on average. However, difficulties may arise in a situation when payments for a prior successful year would need to be made during an economically difficult year," she said.

The expert said that the achievement of the agreement is positive for Ukraine in the short-term outlook.

"Most importantly, the negative scenario weighed by the market (debt moratorium) has now been avoided, mitigating the risk of domestic F/X market turbulence. Agreement on the debt operation will also be conducive to swifter relaxation of Ukraine’s current strict F/X controls. It also bodes well for economic recovery prospects, promising a quicker return to global credit markets than in the case of a debt moratorium," she said.

The deal lift tension from the country's balance of payment and boost FX reserves of the National Bank of Ukraine (NBU), Senior Advisor at Alfa-Bank (Ukraine) Roman Shpek said.

RISKS AT EXCHANGE

However, the experts said that the agreement reached by the Ukrainian authorities and the committee of creditors does not mean the restructuring of the country's foreign commercial debt has been finished.

"In order for the restructuring to take place, bondholders will have to approve the exchange offer on a bond-by-bond basis with a sufficient majority and subject to a minimum quorum. In our view, given the attractiveness of the offer relative to market expectations, the risk of a holdout scenario is relatively low," Goldman Sachs analyst Andrew Matheny said.

"The indicative terms have only been agreed with about 50% of the bondholders and while the terms will likely attract good interest, the holdout risks, especially in the front end remain relatively high. In fact, based on public disclosure of fund holdings, we estimate that the bondholder group’s stake in the 2015 maturities is only around 20-25%. These bondholders are also offered the same terms as to those owning the longest maturities, although the contribution of the front-end bonds is more important as it affects both the liquidity and the solvency target while bonds maturing beyond 2020 impact only the solvency target," Sliusarchuk said.

"We believe that other creditors who chose not to participate in the ad-hoc committee will most likely not block its approval. Russia, however, announced yesterday that the Kremlin would not participate in the restructuring. While we believe Russia is only creating complications to pressure other creditors to abstain from the agreement, we also believe that only Russia would consider filing a lawsuit to prevent its passage, Senior Financial Analyst from ICU Taras Kotovych said.

UKRAINE COULD PAY ON RUSSIAN BONDS TO RETAIN COOPERATION WITH IMF

"Russia’s likely non-participation has a minimal impact on Ukraine’s debt-sustainability – relevant debt stock reduction stands to be only $0.6 billion or 0.7% of GDP lower, but would threaten fundability of the $40 billion bail-out package. The restructured sovereign bonds are likely to be immune to such an event," Belan said.

"However, the key question remaining outstanding is how the IMF treats the Russian-held bond, namely whether it is official or commercial debt for the Fund. In the former case, the IMF will not be able to lend to Ukraine unless this debt is restructured," she said.

Analyst from Merrill Lynch Vadym Khramov said that debt restructuring can proceed with or without Russia's participation, and bondholders would have to sign the exit consent when exchanging the debt.

"Russia said that it would not participate in the upcoming debt restructuring and will effectively hold out, in our view, with a request to classify $3bn as bilateral debt to the official sector," he said.

"In any case, there will be no equal treatment with other bond holders, in our view," he said.

Citi analysts said that Citi expects Ukraine to pay Russia in full in order to keep their IMF funding for the next four years.

STATE DEBT RESTRUCTURING DOES NOT SETTLE ECONOMIC PROBLEMS OF UKRAINE

"While the terms of the debt restructuring will likely satisfy the IMF's criteria, in our view, the question of the sustainability of Ukraine's debt remains open. As we have argued previously, this will likely hinge on the willingness and ability of the Ukrainian authorities to follow through on structural and governance reforms and on developments in the conflict in eastern Ukraine," Matheny said.

Shpek said that the postponement of paying debts does not make the borrower rich, it only gives them an opportunity of focusing efforts on earning money. The intensification of structural reforms would be a guarantee of Ukraine's economic success, he said.

OTHER CONSEQUENCES - CDS

According to the report of the Finance Ministry, Ukraine will impose a temporary technical suspension of payments of the eurobonds maturing in September and October in order to allow the completion of the debt restructuring.

"While this is not a formal announcement of a debt moratorium, we think it is possible that investors will turn to the ISDA Determination Committee to rule that this would constitute a moratorium," Sliusarchuk said.

"Importantly, in order for a CDS trigger to happen, a failure to pay event has to materialize as well – due on September 23 – but the date of the credit event would be backdated to the date of the moratorium. This could be relevant for CDS contracts expiring on September 20," she said.

Khramov predicts that payments on CDS, including securities that mature in September 2015, would be settled, as the Finance Ministry officially announced the debt restructuring.

PRICE

The calculation of the cost of new securities depends on expected yield set by investors, taking into account their assumptions on possible risks of Ukraine.

Morgan Stanley experts believe that the optimal yield today is 10% exit yield.

"Additionally, the conflict in eastern Ukraine has deteriorated over the past months, further contributing to uncertainties to the path post-restructuring. Moreover, the recent market turbulence has led to spread widening across EM which puts further pressure on the exit yield," they said.

"We think that under the current restructuring scenario, the exit yield should be around 10-11% on 10-year bonds, as risks of another restructuring default could persist but the yield would have to go down for technical reasons," Khramov said.

"Also, our surveys show that investors largely see fair exit yields between 11% and 15%," he said.

"Our base case, based on our sovereign credit spread modeling and past restructuring episodes, points to a 14% exit yield, in our view, market consensus is lower and closer to 12%, and risks to our view are skewed to the downside," Matheny said.

The calculation of GDP warrants is more complicated due to unclear development of the Ukrainian economy in the long-term outlook. "This instrument is likely to be largely discounted by the high risk of low GDP growth and potential issues with measuring GDP growth and even GDP more than five years from now," Khramov said.