Citigroup underwrites the first "Ukraine Reconstruction Bond," "the biggest opportunity in the bond market in the coming years," Wall Street can’t wait any longer?

Faced with the $524 billion reconstruction market in Ukraine estimated by the World Bank, Citigroup is taking the lead and plans to underwrite the world's first "debt-for-reconstruction" bond.

Media reports reveal that this product aims to help the National Power Company of Ukraine (NPC Ukrenergo) refinance part of its debt on more attractive terms, with the saved interest costs used to repair the power system damaged by the war.

According to insiders cited by the media, Citigroup has been continuously promoting this product to potential investors since the end of last year.

Market analysts believe that financing for Ukraine's reconstruction will become an important opportunity in the global capital markets in the future, with several international financial institutions competing to position themselves, while Citigroup is trying to seize the initiative in this emerging market.

Seizing the Initiative

Internally, Citigroup refers to this transaction as a "debt-for-reconstruction swap," which draws on the structure of existing tools such as "debt-for-nature."

If successful, this would be the first such transaction arranged by an investment bank. According to an insider, as of May this year, Citigroup has set a target size for this transaction between $750 million and $1 billion.

This transaction will also mark Citigroup's entry into the ESG debt swap arrangement market, where its competitors JP Morgan, Standard Chartered, and Mitsubishi UFJ Financial Group have already entered last year. Data shows that the new issuance size of the commercial sustainability debt swap market has more than doubled last year.

It is worth mentioning that Citigroup is the only Wall Street bank that has continued to operate in Ukraine since the outbreak of the war, with approximately 500 clients in the country, including the Ukrainian government.

Julie Monaco, the bank's soon-to-be-retired global public sector banking head, stated in June that a "large number of opportunities" are expected in Ukraine after the war ends. Her successor, Stephanie von Friedeburg, indicated that the "debt-for-reconstruction" structure Citigroup hopes to establish is well-suited to achieve a range of goals, including food security, energy security, and health and education.

In addition to the proposed bond transaction, Citigroup has other business activities in Ukraine. Earlier this year, Citigroup signed a $100 million revolving credit agreement with the European Bank for Reconstruction and Development (EBRD) to increase the supply of the local currency to local enterprises. At the same time, Citigroup is also collaborating with the U.S. International Development Finance Corporation (DFC) to develop a domestic mortgage market in Ukraine.

Uncertainty and Potential Risk Mitigation Solutions

The main obstacle facing this transaction is the changing situation in Ukraine. Media reports, citing insiders, indicate that investor interest is "mixed."

To address geopolitical risks, the U.S. International Development Finance Corporation (DFC) may become a key player in the transaction. Media reports, citing two insiders, suggest that if Citigroup proceeds with this debt swap, the DFC is likely to be involved DFC is a U.S. government agency created by Trump during his first presidential term, aimed at advancing U.S. overseas interests through financial tools. Its key role is to provide "political risk insurance" for transactions to alleviate concerns of private investors. Previously, DFC has successfully played this role in similar transactions in countries such as Belize, Ecuador, and Gabon, providing U.S. government credit backing for the deals.

It is noteworthy that, according to an agreement signed earlier this year between the U.S. and Ukraine, DFC will be responsible for managing an agreement that grants the U.S. priority access rights in the development of natural resources in Ukraine.

Additionally, this proposed transaction is taking place against the backdrop of broader debt management in Ukraine.

Last year, Ukraine reached a $20.5 billion bond restructuring agreement but still needs to renegotiate $2.6 billion in economic growth-linked warrants and a $700 million loan from Cargill Financial Services International. The direct beneficiary of this transaction, Ukrenergo, is currently also restructuring its $825 million bonds