Naftogaz Ukraine announced a default on eurobonds due to the refusal of the Ukrainian Cabinet, as the company’s shareholder, to approve payments on them. This was stated in the company’s press release, published on July 26 evening. That day, the company would have had to pay its investors $335 million and €45 million.
Why did Naftogaz announce a default?
There are three issues of Naftogaz eurobonds currently on the market. They were all placed in 2019: three-year bonds amounting to $335 million and five-year bonds amounting to €600 million at a 7.125% interest rate were issued in July, and then in November, seven-year bonds amounting to $500 million were placed. The 2022 eurobond repayment, as well as coupon payments under them and the 2024 eurobonds, were due on July 19.
On July 7, the cabinet authorized Naftogaz to make an agreement with the issuer of its eurobonds, Kondor Finance, on changes to the credit terms.
On July 12, Naftogaz proposed to the holders of its eurobonds worth almost $1.5 million to freeze payments on coupons for two years and in particular, to postpone repayment of 2022 eurobonds amounting to $335 million for the same period due to the need to import an additional 4 billion cubic meters of natural gas worth of approximately $8 billion, as instructed by the Cabinet.
The bond holders had to make a decision by July 21, and their meeting was scheduled for July 26, during the grace period, which is five business days for Naftogaz eurobonds.
An adviser engaged by a number of bondholders recommended rejecting the proposition of Naftogaz.
On July 21, the Cabinet of Ministers recognized the work of Naftogaz’s board with regard to renegotiating the credit terms with Kondor Finance as unsatisfactory.
The government instructed Naftogaz to enter into an agreement with Kondor Finance on the conditions the Cabinet imposed, which have not been published in its order.
What will happen after the default has been announced?
The management of Naftogaz states that the company has enough money in its accounts to make the required payments under eurobonds, but the Cabinet prohibited such payments.
"As this failure to meet its eurobond obligations effectively deprives Naftogaz of access to international capital markets, the Cabinet of Ministers as the responsible party now assumes full responsibility for raising the funds necessary for the import of natural gas for the 2022-2023 heating season," the company’s press service sums up.
It was reported that Naftogaz is drafting a new agreement with eurobond holders to defer the payments, "which complies with the requirements of the government in full".
Experts think that, in the time of war, Naftogaz is unlikely to undergo the classic insolvency procedure. Most probably, investors will approve the proposed restructuring terms.
Why is there a conflict between the government and the Naftogaz management?
The EP wrote that the Cabinet’s position was based on the fact that Ukraine’s foreign partners wouldn't understand why, while the sovereign debt was frozen, investors of state-owned companies were to receive payments.
"To pay the debts of Naftogaz in these conditions would have been strange, to say the least. The government’s debt is the sovereign’s debt. And when its restructuring is being negotiated, it means that debts of quasi-sovereigns should not be serviced," said executive director of CASE Ukraine Dmytro Boiarchuk in his commentary for the EP.
The government argues that Naftogaz needs to save money to buy gas as it prepares for the heating season.
He expects Naftogaz to follow the example of Ukrenergo and Ukravtodor, which have started to restructure their debts.
How can the default of Naftogaz affect gas imports?
In June, the Cabinet instructed Naftogaz to accumulate at least 19 billion cubic meters of gas before the start of the heating season, while Vitrenko publicly stated that 15 billion cubic meters would be enough to live through the winter.
"The Cabinet is being overcautious and trying to account for all possible risks, including living through the winter with no gas imports. This raises the bar for reserves in storage facilities to 19 billion cubic meters," he explained.
A few weeks ago, it was reported that at least 11 billion cubic meters had been accumulated in storage facilities.
Gas is still supplied to Ukraine. According to the Gas Transmission System Operator of Ukraine, on July 25, 532,000 cubic meters came from Slovakia and 2,964 million cubic meters from Poland.
Naftogaz has money to pay for the current imports.
The €300 million loan from the EBRD, which Naftogaz planned to use to buy gas, is now doubtful. State guarantees for the loan were offered, but the money hasn’t yet been transferred to the accounts of Naftogaz. The EBRD’s response to the default of Naftogaz is still unknown, but experts believe the bank is unlikely to reject the loan.