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Fitch Upgrades Naftogaz Debt to BB-, Removes Negative Watch on Budget Approval

January 11, 2008 | Сbonds

Fitch Ratings-London – 10 January 2008: Fitch Ratings has today upgraded NJSC Naftogaz of Ukraine’s (Naftogaz) senior unsecured rating to ‘BB-’ (BB minus) from ‘B+’ and removed it from Rating Watch Negative (RWN). Fitch has affirmed its Recovery Rating at ‘RR4’. Naftogaz’s Long-term foreign and local currency Issuer Default Ratings (IDR) of ‘B+’ remain on RWN. This upgrade was precipitated by a state budget provision to guarantee Naftogaz’s existing debt held by non-residents.

Naftogaz’s IDRs remain on RWN due to continued uncertainty surrounding the current and future financial position of the company. In February 2008 Naftogaz will undergo a regulatory price review. Also, by this time the company’s FY06 IFRS statement should have been released, and Naftogaz’s ratings will then be reviewed.

On 30 December 2007 the Ukrainian President approved the state budget for 2008. The budget contains a provision for guarantee, by the State, of Naftogaz debt held by non-residents of Ukraine, for up to a maximum of UAH12bn. This provision covers the company’s USD500 million Eurobond maturing in 2009, for which the senior unsecured rating has been upgraded to ‘BB-’ (BB minus).

A resolution of Naftogaz’s bondholders on 25 October 2007 temporarily waived an earlier technical default by the company after it failed to publish its FY06 IFRS statement by 31 August 2007. Naftogaz, however, also failed to publish its FY06 IFRS financial statements by the new deadline 31 December 2007; this means that until a further waiver is obtained the company is in technical breach of its 2009 Eurobond issue documentation (loan participation notes through Standard Bank London Holding PLC).

Given the budget provision for state guarantee of Naftogaz’s existing debt, Fitch considers that bond investors will likely agree to a further waiver of the technical default and has therefore removed Naftogaz’s senior unsecured rating from RWN. Furthermore, given the explicit nature of the guarantee, Fitch has upgraded the senior unsecured rating to reflect the budget provision. There remains a risk related to the administrative execution of the guarantee, which involves a series of approvals from relevant ministries should the guarantee be called. As such, Fitch views this as sovereign risk relating to the execution of approved budgets; this risk is reflected in Naftogaz's senior unsecured rating of ‘BB-’ (at the same level as Ukraine's LT IDRs).

Company: Naftogaz

Full company namePJSC "Naftogaz of Ukraine"
Country of riskUkraine
Country of registrationUkraine
IndustryOil and gas


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