Ukraine's Naftogaz pays blocked bond coupon, averts damaging default


* $21.7 mln frozen by London court in suit by unnamed party

* Non-payment could have resulted in debt default

* Naftogaz panic hits Ukraine amid trade threats from Russia

By Natalia Zinets

KIEV, Oct 9 (Reuters) - Ukraine's state oil firm Naftogazhas paid a delayed $21.7 million coupon to bondholders after itsfirst payment was frozen by a London court, the finance ministrysaid on Wednesday, narrowly averting a damaging debt default.

The company, whose bond was fully guaranteed by theUkrainian government as part of an older 2009 debtrestructuring, had until Oct. 10 to make the payment originallydue on Sept. 30 as part of a $75.8 million bond coupon.

Failure to pay within the 10-day grace period could havetriggered so-called cross default, not only on Naftogaz's entireoutstanding debt but eventually on billions of dollars ofUkrainian sovereign bonds, in what would have been a major blowfor a country that is already facing deep financial stress.

The cash-strapped ex-Soviet republic's ability to pay debtshas aroused concern among rating agencies as it prepares nextmonth to sign association and free trade agreements with theEuropean Union despite threats from traditional partner Russia.

Ukraine's finance ministry said it had repeated the payment,which had been frozen by a London court on behalf of an unnamedthird-party creditor.

"Naftogaz's paying agent last night carried out full settlement of the coupon payment in favour of theeurobondholders," Galina Pakhachuk, head of the ministry's debtdepartment, told Reuters.

"The bondholders received the whole sum of the couponpayment," she added.

The bond, which matures next September, rosemore than half a point on the news, with yields falling to 16.4 percent, slipping from the previous session's record high of17.2 percent.

Naftogaz has often been at the centre of energy rows withRussia which have previously led to supply cuts to Europe.

Though the last-minute move appears to have averted adefault crisis at Naftogaz, the panic over the repeat paymentunderlines the parlous state of Ukraine's finances.

It is estimated to have more than $10 billion in maturingdebt over the coming year, almost equivalent to its centralbank's entire usable reserve stash.

This includes the $1.6 billion Naftogaz bond as well as a $1billion sovereign bond maturing next June.


Ukraine cannot draw on International Monetary Fund money.

The IMF froze a $15 billion programme with Ukraine in 2011after the Kiev government reneged on pledges to curb subsidiesto Naftogaz and raise the price of domestic gas.

Though an IMF technical mission is expected in Ukraine thismonth, the Kiev government has not yet announced plans to askfor a new bailout programme. Analysts said a default would have allowed creditors toclaim the entire outstanding amount from Ukraine. Failure by thesovereign to satisfy the claim would trigger cross defaultacross all other Ukrainian sovereign liabilities.

"It would have been crazy not to pay the $21.7 million(again) because if all the debt becomes repayable instantly,Ukraine cannot afford to repay," said Max Wolman, a fund managerat Aberdeen Asset Management who no longer holds the bond.

The danger is of a repeat of this episode, he said.

"There will be future coupon payments and unless Ukrainesettles all outstanding debt repayments, you could again get acourt case like this that attaches a coupon payment andultimately results in cross default. That's the risk Ukrainefaces."

Some analysts noted the case coincided with Ukraine'sdeteriorating relationship with neighbouring Russia, which hasbeen angered by Ukraine's efforts to build a closer relationshipwith the European Union.

"Is Naftogaz the back door means of achieving (a Ukrainiandefault) and of trying to force Ukraine back into the Russiancamp?" Standard Bank analyst Tim Ash said in a note.

Naftogaz defaulted on a $500 million Eurobond at the end ofSeptember 2009, later issuing a $1.59 billion five-year bondwith a sovereign guarantee as part of the debt restructuring.

Ratings agencies have expressed growing concern overUkraine's shrinking reserves, trade and budget deficits and aworsening relationship with its big trading partner, Russia.

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