On March 8, 2016, CEE Legal Matters reported that Sayenko & Kharenko had advised Sberbank on the restructuring of a sovereign-guaranteed loan to Yuzhnoya’s State Design Office and the Road Agency of Ukraine (Ukravtodor) with an outstanding principal balance of approximately USD 367 million and had advised Sberbank and Citibank on the restructuring of another loan to Ukravtodor with an outstanding principal balance of EUR 37.3 million. Linklaters advised the banks on matters of English law, and Avellum acted as Ukrainian counsel to the Ministry of Finance of Ukraine on both matters.
As we reported at the time, the outstanding principal balance of the two sovereign-guaranteed loans and accrued interest thereon were discharged in full, and the two loans were terminated, in exchange for the delivery to lenders in respective portions of (i) the USD 315.769 million aggregate principal amount of Ukraine’s 7.75% notes due in 2019, representing 75% of the outstanding principal balance of the loans plus accrued interest, and (ii) the USD 102.246 million aggregate notional amount of Ukraine’s GDP-linked securities, representing the remaining 25% of the outstanding principal balance of the loans.
We reached out to Nazar Chernyavsky, the Partner at Sayenko Kharenko who led his firm’s team on the restructurings, for more information.
How did you and Sayenko Kharenko become involved in the deal?
N.C.: We became involved through Linklaters – the banks’ English-law advisor. Since we advised on the previous Ukrainian sub-sovereigns restructuring deals in 2015, Linklaters approached us with a request to assist the banks with the restructuring of the loans to Ukravtodor and the Yuzhnoye State Design Office.
At what stage were you brought on board, and what, exactly, was your mandate when you were retained?
N.C.: We became involved once the preliminary commercial agreement on going through with the deals was reached by the Ministry of Finance and Sberbank and Citibank. The deal structure was preliminarily discussed, and we were expected to analyze it, provide our general views on viability from the Ukrainian law perspective, and verify several structural issues which were subject to negotiation. As the preparation went forward, we had to change several elements to accommodate the banks’ requirements for execution.
Who were the members of your team, and what were their individual responsibilities?
N.C.: I was the Partner responsible for structuring and overall supervision of the deal. The firm’s Counsel Anton Korobeynikov generally managed the transaction documentation and the firm’s deliverables (e.g., legal opinions), and he was assisted in that by Associate Taras Shyb. Apart from the core team, we also involved members of our arbitration and corporate law teams to ensure that the relevant bits of the transaction documentation were in order.
How was the loan restructured and the new loan structured, and how did you help achieve those results?
N.C.: The basic idea underlying both transactions was to restructure the loans made to Ukravtodor and Yuzhnoye State Design Office by exchanging them into sovereign Eurobonds and value-recovery instruments issued by the State of Ukraine within the framework of restructuring of its own sovereign debt in 2015.
The exchange was made through replacement of the borrower under each loan with the State of Ukraine by means of novation. Simultaneously with that, new sovereign Eurobonds and value recovery instruments were issued and delivered to Sberbank and Citibank to replace the novated loan.
The main task of the banks’ advisors was to ensure that the execution (consisting of the replacement of the borrower and issuing and delivering new Eurobonds in exchange for the loans) not be interrupted, leaving the banks midway through the process. Our team, in co-operation with Linklaters, managed to tweak the transaction structure to keep the banks’ position as protected as possible throughout the whole execution process.
What would you describe as the most challenging or frustrating part of the process, and why?
N.C.: The most challenging part of the process was to reach an agreement among the parties as to what flexibility is allowed under Ukrainian law. Since the transaction was a one-off exercise (meaning that the sovereign does not assume the debt of sub-sovereigns on a regular basis), the regulation of the transaction was quite limited. More specifically, there was just one paragraph in the Ukrainian 2016 budget law which described how this transaction should be done. Due to its general nature, the provision provided some flexibility on the one hand, but, on the other, was subject to different interpretations as to the sequence of steps. As a result, the legal advisors of the banks and of the Ministry of Finance had to spend some time to agree on the interpretation and the execution approach that would be acceptable to all parties.
Did the final result match your initial mandate, or did it change/transform somehow from what was initially anticipated?
N.C.: Due to the general nature of our mandate, the result generally matched what was requested from us in the beginning. Some tweaks were made in the course of the transaction, and we had to provide a bit more detailed explanations of various concepts involved (in particular, the detailed regulation by the 2016 budget law, the value-recovery instruments or “state derivatives” as they are called in the Ukrainian laws, etc.).
What individuals in Sberbank and Citibank directed you, and how would you describe your working relationship with them?
N.C.: The Sberbank and Citibank teams working on the transaction showed a good understanding of the issues involved and active thinking in resolving the problems arising in the course of the transaction. We have had a great established working process and effective communications with both banks and spent a number of quite interesting legal discussions at the time of brainstorming the deal elements.
Did you work closely with Linklaters, or were the roles distinct, without much need for communication/cooperation? Can you describe that relationship?
N.C.: Linklaters had a co-ordinating English-law counsel role on the transaction. As a result, we co-operated closely with them in getting the deal done. Generally, our firm has a long-lasting relationship with Linklaters. On this transaction, as usual, we had professional and constructive communication which enabled us to achieve the best result for our clients.
How would you describe the working relationship with your counterparts at Avellum on the deal?
N.C.: We work regularly on Ukrainian capital market and finance deals with Avellum. As a result, we know their team very well and are very comfortable in having them advising the counterparty to our client.
How would you describe the significance of the deal in Ukraine?
N.C.: The deal was one of very few similar deals for Ukraine. By successfully completing the restructuring of loans of Ukravtodor and Yuzhnoye State Design Office, Ukraine managed to lessen the debt burden, which is crucial in the current difficult economic and financial environment. In addition, by accomplishing this restructuring Ukraine made another step in complying with the requirements of the IMF Extended Fund Facility to manage external sovereign and sub-sovereign debt.
This Article was originally published in Issue 3.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.