Ukraine’s state-owned oil and gas company Naftogaz is facing default on its eurobonds that come due on July 26 after it failed to convince investors to change the payment terms and also failed to get permission from the government to make the upcoming payments.

Earlier this month the government ordered Naftogaz to start asking bondholders for permission to delay its coupon payments in order to “preserve cash” for gas payments this winter.

As bne IntelliNews has reported, Ukraine is running out of money and with its gas tanks only 21% full as of July 21 it must buy over $7bn worth of gas to replenish its stocks for the coming cold weather.

The Paris club of bilateral lenders to the Ukrainian government have agreed to delay receiving payments until the end of this year and with the possibility of extending that until the end of next year too. The club recommended that other bondholders also agree to delay the payments, but the Paris Club has no powers over any of the holders of Ukraine’s bonds.

The Cabinet of Ministers of Ukraine called the work of Naftogaz’s board “unsatisfactory” in a document and instructed the company to make an agreement with its issuer Kondor Finance on changes to the new terms. But the conditions for the new agreement have not been published by the Cabinet of Ministers.

Trouble with Naftogaz emerged earlier this month after the company asked bondholders for a two-year payment freeze on $1.4bn of its bonds, including a $335mn 2022 eurobond coupon payment due on July 19.

However, advisors from Dechert, appointed by creditors, told bondholders to reject the request, believing that Naftogaz is able to pay on time, and they continue to view the company as a profitable going concern.

It was revealed on July 15 that the government ordered Naftogaz to delay debt payments, surprising the chairman Yuriy Vitrenko, who claims that the company had been planning finances to redeem the eurobonds and buy gas.

Can pay, but not allowed

The management of Naftogaz was surprised by the government’s order to delay the payments on eurobonds and says that it has the cash and is willing to meet its obligations in order to preserve its credit history.

However, the government remains reluctant. Running a $5bn a month deficit, the government is desperate for cash and promises of two payments of $9bn from the US and €8bn from the EU have been dogged by bureaucratic delays. European Commission President Ursula von der Leyen said on July 25 that the EU was releasing €1.36bn in aid for the budget, but the remaining part of the €8bn promised package remains tied up.

With the refusal of some bondholders to change the terms of their bonds, Naftogaz management approached the government for the latter's permission to make the payments on July 26. But as the deadline looms, Naftogaz management say they have yet to get an answer.

“Given that the proposal to defer the payments for the Eurobonds, driven by the position of the government to use these funds for the import of natural gas, was not supported by the bondholders, the original terms of the bonds continue to apply. Naftogaz is therefore required to make relevant payments of principal and interest on 26 July, 2022 (within the grace period specified),” Naftogaz said in a statement on July 25.

Last week Naftogaz CFO and then the CEO approached the Cabinet of Ministers with a request to make the payments, saying the company has both the cash and the obligation to pay.

“In their applications to the government the national company informed that the company had funds for making the payments, as well as informed on potential risks for the company and the state in general in case of “hard default” (violation of payment obligations), which would occur if the state did not approve payments by Naftogaz to the bondholders,” Naftogaz said. “At the time of publication of this press release, Naftogaz did not receive approval of the government, and accordingly cannot transfer funds for payments to the bondholders.”

Left in limbo, Naftogaz’s management is preparing a fresh appeal to bondholders seeking permission to delay the next payments on their bonds.

In May of 2022 international auditors confirmed that Naftogaz again became profitable company based on the 2021 year results, and that Naftogaz has the ability to continue as a going concern in 2022, in particular to ensure its solvency even despite the full-scale war. The relevant financial statements were approved by the Cabinet of Ministers, Naftogaz emphasised in its press release.