Naftogaz confirms postponement of Eurobond placement

Naftogaz of Ukraine (NAFTO) officially confirmed the evening
of Oct. 20 that it has decided to postpone the placement of dollar Eurobonds,
referring to “a series of negative news” that made international investors
“more and more concerned about the political and operating environment in
Ukraine.” Among the reasons to postpone the deal, company CFO Peter van Driel listed
the recent allegations of the State Audit Service of Ukraine (which allegedly
found multi-billion discrepancies in Naftogaz accounts), some corporate
governance issues and “the development of relations with the IMF,” implying a
negative turn.

Recall, on Oct. 14, Naftogaz reported on its intention to buy backits Eurobonds maturing in 2022 and 2024 for a maximum par value of USD 335 mln,
if it’s able to place a longer Eurobond. Later on, the company initiated the
placement of a USD 500 mln Eurobond maturing in February 2027. As of Oct. 19,
media reported that the placement rate of the new bonds would be 8.95%.

Alexander Paraschiy: The explanation
offered about the bond placement’s failure isn’t convincing. All the “reasons”
were known well ahead of the company’s attempt to place the bond. To the
mentioned “reasons”, we would add more weighty evidence, such as awful Naftogaz interim financials.
However, in our view, what really scared Naftogaz’s potential bondholders was
the bad timing of the placement (as we highlighted on Oct. 15).
Namely, it’s the sole fact that Naftogaz dared to issue new bonds despite such
obvious contraindications (the only additional negative factor that appeared
last week was the scandal around the reprimandof two pro-IMF executives of the National Bank). Moreover, some creditors could
have reasonably concluded that Naftogaz does not see any better window for a
bond placement in the next 20 months (up until the earliest existing bond
matures), meaning the company is expecting even worse times ahead. The obvious
reaction of creditors to such a poorly timed attempt is to demand a higher
interest rate.

In our view, Naftogaz’s decision to put off the deal looks
logical. As natural gas prices are rising, the company has a chance to improve
its P&L in 2H20. Meanwhile, Ukraine will have a chance to secure another
IMF tranche and reduce its sovereign risk. If so, Naftogaz may have a new
window for a bond placement at a better rate in 1H21.