Sunday, August 14

Ukraine default fears grow as Naftogaz asks for debt freeze


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LONDON — Ukraine’s state-owned gas company Naftogaz has asked its international creditors to defer payments on its debt for two years, fanning expectations that the government may soon do the same.

Naftogaz which has a $335 million bond maturing as well as two interest payments due on July 19, said Russia’s invasion had left it short of cash as many of its customers were now unable to pay their bills.

In its request for the payment freeze, Naftogaz said Russia’s ongoing invasion had resulted in a “significant economic and business decline in Ukraine” and that customers’ missed bill payments had “negatively affected its liquidity position.”

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“The Issuer, at the request of the Borrower, has launched this Consent Solicitation in order to seek approval from Noteholders to facilitate preservation of available cash … to support Ukraine’s strategic priorities,” Naftogaz’s gas financing arm Kondor Finance said in a statement published late on Monday.

The plan, on which bondholders have until July 21 to vote, would defer all of the company’s main international bond payments until July 2024. In addition to the one due next week and in 2024, it also has one due for repayment in 2026.

Naftogaz is a major source of income for Ukraine, accounting for almost 17% of the country’s total state budget revenue last year and employing over 50,000 people before the war.

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BLUEPRINT

The plan will also raise expectations that the government itself may look to do something similar ahead of a near $1 billion sovereign bond payment due in September, although it has so far said that it intends to make the payment.

Ukrainian Railways, another state-controlled firm, confirmed on Tuesday that it had made $36 million in interest coupon payments on two of its bonds due in 2024 and 2026.

Authorities however estimate a fiscal shortfall of $5 billion – or 2.5% of pre-war GDP – a month, which economists calculate pushes Ukraine’s annual deficit to 25% of GDP compared with 3.5% before the conflict.

“It (Naftogaz’s deferral plan) might be blueprint for Ukraine,” said Viktor Szabo, a portfolio manager at investment firm abrdn in London.

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Kyiv’s September sovereign bond plunged around 12 cents on the Naftogaz news according to fixed income traders, which left it at just under 40 cents on the dollar, or 40% of its face value. Naftogaz’s bonds were being quoted as low as 11 cents.

Yerlan Syzdykov, global head of emerging markets at Amundi Asset Management, which holds Ukraine’s sovereign bonds, said it would make sense for Ukraine to halt bond payments now via what is known as a “standstill” agreement.

“The sooner they do this the more sense it makes,” Syzdykov said.

Lutz Roehmeyer at Capitulum Asset Management, which holds both Naftogaz international and Ukraine sovereign bonds added there were lots of questions, for example what size will Ukraine’s economy be down the line.

(Additional reporting by Karin Strohecker, editing by Jason Neely, Susan Fenton and David Evans)

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financialpost.com