Ukraine’s Debt Is ‘Unsustainable’: Invesco

"I think six months ago many business leaders were expecting or at least hoping that the country would be emerging from the other side of the recent turmoil and starting to show improvement," he said. "Instead, while there appear to have been some hopeful developments in the East, the economy is now basically in free fall, in our opinion. The key assumption back then — that has turned out to be incorrect — was that Western countries would step in and provide adequate economic support to Ukraine, thereby lessening Russia's influence."

Some of this shifting opinion may also have to do with the economy's effect on the operating environment for corporates in Ukraine over the last 12-18 months. "With the Ukraine economy under significant pressure, the operating environment has gotten very challenging for even the strongest companies, in our view," Trujillo said.  "Perhaps one of the biggest problems, is that, across sectors, foreign suppliers of key input materials, such as fertilizer, are demanding upfront payments before sending goods."

This is a "significant departure" from the previous standard of the average 60-day payment terms, Trujillo said. This change in payment terms has now caused companies to tie up a large amount of cash in working capital, which Trujillo said couldn't come at a worse possible time because it's happening right as "incremental financing is becoming more or less nonexistent."

"This, coupled with the sharp drop in local demand, has put significant pressure on liquidity within the corporate space, in our view," he said.

This liquidity pressure has also caused several corporates to enter into voluntary restructurings with bond holders, according to the Invesco report.

"The challenging operating environment and limited availability of financing that Ukrainian companies are facing has created a severe liquidity crunch across the business sector," Trujillo said. "So, it is not surprising that we have begun to see companies attempt to restructure their debt."

And with a sovereign restructuring now a certainty, Trujillo believes that it only makes it more likely that more companies will restructure their debt because "the sovereign restructuring makes international banks increasingly reluctant to lend in the Ukraine."

That along with Ukraine's weak economic outlook will most likely drive companies to make every effort to preserve liquidity, Trujillo added.

"That said, I don't think we will see every corporate entity restructure — perhaps many, but not all," he said. "The very top tier of Ukrainian corporates has so far shown its ability to access international capital markets. However, this is a very small club."

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