Ukraine's Naftogaz sweetens deal for bondholders in search for debt relief

By Rodrigo Campos

NEW YORK (Reuters) -Ukrainian state-owned gas company Naftogaz has laid out a new debt payment freeze plan, a week after becoming the first government entity to default since the start of the Russian invasion in late February.

The energy company's finances have been under strain since the war started as many of its customers have not been able to pay their bills.

Naftogaz's proposal, announced on Tuesday, includes a two-year payment freeze and two-year deferral on the maturities of the notes, which are set to expire in 2022, 2024 and 2026.

The notes would pay additional interest while deferred interest would continue to accrue at the set rates of each note.

The proposal went out to holders of the $335 million, 7.375% notes due 2022; the 600 million euro, 7.125% notes due 2024; and the $500 million, 7.625% notes due 2026.

Naftogaz's initial proposal, sent out a week before the July 19 maturity of the 2022 note, was rejected by holders, who said they did not recognise that the company would have a liquidity shortage.

The consent solicitation was launched "in light of the prolonged circumstances affecting Ukraine as a result of the ongoing full scale military invasion," according to the document, and looks to "facilitate preservation of available cash by (Naftogaz) to support Ukraine’s strategic priorities."

The Ukrainian government late on Monday gave Naftogaz the go-ahead to agree new terms of restructuring its international bonds.

In a statement late on Tuesday, Naftogaz confirmed that the finance ministry had coordinated with it on the plan.

"The conditions of the proposal comply with the conditions of the proposal to the investors to postpone payments for sovereign Eurobonds of Ukraine and proposals to investors from Ukrenergo and Ukravtodor," Naftogaz said in the statement https://www.naftogaz.com/en/news/government-new-proposal-eurobond-payments.

Ukraine's government, which faces an acute liquidity squeeze and $5 billion-a-month fiscal gap, has asked the holders of some $20 billion in international bonds to defer payments for at least two years. Ukravtodor, the state agency for roads, and government-owned firm Ukrenergy have launched similar proposals.

Naftogaz holders have until Aug. 12 to cast their vote on the proposal, the document showed, with a meeting scheduled for Aug. 17 at 11 a.m. London time (1000 GMT).

To get the proposal agreed, a quorum of two thirds of the total face value of the Eurobonds was needed while 75% of meeting participants need to vote in favour, Naftogaz said in its statement.

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The consent solicitation was made by Naftogaz through its financial arm, Kondor Finance, the issuer of the notes. The default on the 2022 bond payment may trigger acceleration of payments on the other notes, but does not trigger a sovereign cross default.

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 more than 50,000 people before the war.