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. Last Updated: 07/27/2016

Naftogaz Fails to Repay Eurobond, Proposes Restructuring

Ukrainian state energy firm Naftogaz said on Thursday that it had not repaid a $500 million eurobond by its maturity deadline, causing rating agency Fitch to downgrade it to restricted default.

Naftogaz, which transports Russian natural gas to European consumers, said in a statement that it had failed to pay principal on the bonds that matured Wednesday, saying the bond issue was subject to a proposal to be considered on Oct. 19 to restructure its entire foreign debt by swapping it for a new 5-year bond worth $1.65 billion with a 9.5 percent coupon.

Naftogaz has been at the center of several gas price rows between Ukraine and Russia, the last of which in January this year led to Russian gas supplies transiting across Ukraine being cut to thousands of consumers in southern Europe. 
But the company said on Thursday that Naftogaz's debt problems would not affect the transit of Russian gas to Europe nor Kiev's monthly payments for gas supplies.

"The process of debt restructuring will have no affect on Ukraine's payments to Gazprom, domestic prices for consumers, or the stability of the transit of Russian gas to Europe," Naftogaz spokesman Valentyn Zemlyansky said.

Naftogaz confirmed that it had paid out a regular coupon on the bond — a move that it hoped would pave the way for smooth restructuring talks — but analysts said a failure to redeem the bonds was tantamount to a default.

"They paid the coupon, but not the principal. What is it? It's default," said Pyotr Grishin, an analyst with the investment bank Renaissance Capital. He added, however, that the proposed restructuring deal was highly likely and that the default would not have a drastic effect on the company or the Ukrainian government.

"Markets have a very short memory," Grishin said. "This won't have any effect on anything." 

Several bondholders reacted positively on Wednesday to the proposal.

"The principal on the eurobonds remains subject to a consent to exchange 100 percent of the bonds for new U.S. dollar-denominated bonds … which will benefit from an irrevocable and unconditional sovereign guarantee from the government of Ukraine," it said in a statement.

"Naftogaz of Ukraine continues to believe that the best course for bondholders is to review the proposal and carefully consider the terms of the offer," Naftogaz said.

Naftogaz has proposed converting the existing eurobond and other bilateral debts into a $1.65 billion bond due in September 2014 and increasing the interest rate from the current 8.125 percent to 9.5 percent. The proposal offers explicit state guarantees for the bonds.

Krawchenko agreed that investors would likely agree to the proposals, but said t Naftogaz was in need of wide-ranging reforms. He said the company must end the practice of importing natural gas from Russia and then selling it to domestic consumers at much lower prices.

"This is the fundamental problem with Naftogaz that needs to be resolved," Krawchenko said.

(AP, Reuters)