(Bloomberg) -- Ukraine’s first formal talks on restructuring more than $20 billion worth of international bonds ended without a deal as creditors pushed back against Kyiv’s proposal for debt relief.

With repayments set to resume this summer, Ukraine is asking debt holders to accept bigger losses that would allow it to finance its defense efforts against Russia and prepare financial resources for reconstruction when the war ends. It’s also pushing bondholders to fit their offer within the debt-burden threshold set by the International Monetary Fund.

“As we approach the deadline, we must urge our bondholders to continue productive and good-faith negotiations, with more substantial debt relief to be reflected in their proposals in line with the IMF parameters and Ukraine’s current macro-financial situation,” Finance Minister Serhiy Marchenko said in a statement on Monday.

A clearer picture of the IMF’s economic growth and debt estimates will emerge after its executive board approves a preliminary agreement reached in late May with Kyiv. A board vote is informally scheduled for June 28, according to people familiar with the situation who asked not to be identified as the date hasn’t been finalized. The IMF didn’t respond to a request for comment.

The talks between Ukraine and a group of bondholders began two weeks ago with private creditors signing non-disclosure agreements to allow for the sharing of sensitive non-public information. Bondholders haven’t received any payments from Ukraine since 2022, when they agreed to a two-year moratorium after Russia invaded. The standstill expires on Aug. 1.

In a separate statement, the ad-hoc creditors’ group said they’re committed to finding a deal, although they considered the haircut proposed by the government to be “significantly in excess of market expectation, which is consistent with a 20% haircut.”

Kyiv said that it will continue discussions “with a view to making further progress and reaching an agreement in principle at the earliest opportunity.” 

Ukraine’s dollar debt was among the worst performers across emerging markets Monday. The nation’s bonds weakened across the curve, with the notes due in 2035 dropping the most since April, to trade at 25.78 cents on the dollar by 9:45 a.m. in London. 

In the talks, Ukraine proposed exchanging its outstanding bonds for a series of new bonds with maturities up to 2040 and interest payments starting at 1% for the first 18 months, then progressively increasing to 6%. 

The government also offered investors a so-called state contingency instrument that could begin payments only after 2027. Payments on that instrument would be related to Ukraine’s tax revenue targets set by the International Monetary Fund. 

“Both options have been designed to deliver holders cash flows during the IMF program period and provide for a nominal haircut ranging between 25 and 60% depending on the country’s recovery over the IMF program period,” the statement added. 

Approved Offer

Both the IMF and the country’s bilateral creditors, which include the US and the Paris Club, signed off on Ukraine’s proposals, according to the government’s statement. Ukraine’s group of official creditors has already extended a debt repayment standstill to 2027. 

Ukraine also proposed removing a so-called cross default clause between its international bonds and its GDP warrants maturing in 2041, whose payments are linked to economic growth. A cross-default clause means default on one instrument carries over to others. The government said that GDP warrants “need to be taken into account in the design of any restructuring solution.”

The latest proposal offered by Ukraine didn’t include a restructuring of debt from state-owned companies, unlike in 2022, when payments on those bonds were also frozen.

The creditor group offered a 7.75% cash coupon for 40% of the country’s outstanding bonds, with two issuances maturing in 2030 and 2036, while proposed a step up coupon starting at 0.5% via three issuances for another 40% of the debt. Bondholders offered a recovery instrument for the remaining. 

Ukraine said earlier this year that it aimed to complete its debt restructuring with private creditors no later than mid-2024. The government said that its proposals were compatible with the parameters of its $15.6 billion IMF program, including debt-to-growth ratios and gross financing needs. 

The creditor group was first formed in April and represents owners of about 20% of the outstanding bonds. The group includes Amundi, BlackRock and Amia Capital. PJT Partners Ltd. acts as the group’s financial adviser and Weil, Gotshal & Manges LLP is legal adviser to bondholders, while the country has retained Rothschild & Co. and White & Case LLP as financial and legal advisers, respectively.

--With assistance from Kerim Karakaya, Torrey Clark and Eric Martin.

(Updates with expected IMF board vote date in fourth paragraph.)

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