Naftogaz to issue UAH 20.4 bln in bonds

On top of equity infusion, the Cabinet of Ministers also decided Naftogaz has to issue UAH 20.4 bln (USD 2.6 bln) in local bonds to refinance its debt to state-owned Oshchadbank (as of end-2009 the company had above UAH 27 bln in debt due to Ukrainian banks, according to Naftogaz’ IFRS filings). The bonds will be placed in 29 series with maturities ranging from September 2011 to September 2016 with maturing amounts spread approximately evenly (every quarter). Coupon rates are set at 13.75% for 0.6Y-2Y maturities, 11.25% for 2.3Y-4Y and 13.75% for 4.3Y-5.6Y bonds. Mykyta Mykhaylychenko: This is quite a large volume for the local market (even including potential foreign investors) as it equals net placements of UAH bonds at auctions during the whole 2010 (the market also digested UAH 16.4 bln in special sovereign issue “VAT” bonds), while total holdings by foreigners now amount to UAH 11.2 bln. Hence, we do not expect the whole amount to be placed on the open market (some will obviously be bought out by Oshchadbank itself). An attached sovereign guarantee might improve demand for the papers. However, as the 2011 state budget caps state guarantees in 2011 at UAH 15 bln, the chances of this look small now. The bond issuance will spread Naftogaz’ debt maturity profile over time, although now in 2014 the company will have to redeem not only USD 1.6 bln in Eurobonds, but also UAH 4.3 bln (USD 0.5 bln) in UAH bonds (should the latter be issued). The company had negative operating cash flow in 2008-2009.