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UPDATE 1-Ukraine GDP-linked warrants surge as government flags "definite plan"

Marc Jones

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LONDON, Sept 3 (Reuters) - The growth-linked securities Ukraine threw in to sweeten its 2015 debt restructuring surged on Tuesday after the country's new prime minister fanned bets it was looking to buy them out to prevent massive future payments that could cripple its finances.

Oleksiy Honcharuk told reporters in Kiev on Monday that the government had a "definite plan on how to minimize the harm from having these obligations" saying nothing should stand in the way of improving the country's economy.

"To be afraid of economic growth because we have to fulfill some obligations, this is an inadequate approach," he added.

The comments sent the GDP-linked warrants in question up 4 percentage points to 92 points according to Tradeweb data. They have already surged from around 62 points in May before presidential elections.

Ukraine tossed in $3.6 billion in GDP warrants - bonds indexed to economic growth - in its 2015 restructuring after it forced investors to write off 20 percent of the value of their original holdings.

Kiev made one crucial omission though: unlike other warrant issuers, it did not cap future payouts, possibly making itself liable for big annual payments after 2025 when a temporary cap on the potential payments gets removed.

"They (Ukraine government) have no call option on the warrants so they can try to buy it back but it will need to be a decent premium," said Pala Assets' fund manager David Nietlispach, who holds other types of Ukraine debt.

The only other options is to threaten it with default but I don't think they will want to mess around like that having just built up some credibility (with bond buyers) again."

The warrants, with a notional face value of $3.6 billion, are structured to pay out depending on economic data for 2019-2038 although there is a slight delay until 2021 before they start formally paying out.

Also, for the payments to start, Ukraines economy must exceed a minimal nominal GDP threshold of $125.4 billion in any given reference year when calculated using the average hryvnia/dollar exchange rate.

If real, or inflation-adjusted GDP growth then exceeds 3 percent -- as it is expected to do this year -- Ukraine will pay warrant holders a sum equal to 15 percent of economic output above this threshold. However, if real growth is over 4 percent, the payment rises to 40 percent of national wealth created above the higher level.

These variables are all taken from the International Monetary Funds World Economic Outlook, except for the exchange rate which is based on Ukraines central bank data. (Reporting by Marc Jones in London and Natalia Zinets in Kiev, Editing by Karin Strohecker and Alison Williams)