(Adds Ukraine govt comment, CDS, details)
By Sujata Rao and Natalia Zinets
LONDON/KIEV, Oct 1 (Reuters) - Ukraine's state energy company, Naftogaz, has failed to pay a maturing $1.6 billion debt, raising risks of a default on the country's sovereign Eurobonds and sending debt insurance costs to seven-month highs.
The government assured investors on Wednesday they would soon be paid on the bonds, which were due on Sept 30 and have now entered an initial 10-day grace period.
The Eurobond, which amounts to $1.67 billion once interest is included, is fully guaranteed by the Ukrainian government. So if it is not paid within the grace period, it will trigger so-called cross-default clauses, bringing due all of Ukraine's sovereign bonds at once.
"I have not seen the money. I had not expected this," said one European portfolio manager, who requested anonymity. "They are not in default yet, so hopefully we will be paid within the grace period."
The investor said he also held other Ukrainian bonds, which he was now "very uncomfortable" with, though he said high yields somewhat compensated for risks. Ukraine's bonds are trading with yields of more than 10 percent
Ukraine's other dollar bonds have been trading between 82-88 cents in the dollar, on expectation Kiev will be forced into some form of debt restructuring in coming months
Bond prices were mostly unchanged on the day, but Ukraine's sovereign credit default swaps, used by investors to insure exposure to a credit instrument, rose 30 basis points to 1322 bps, the highest since end-February, according to Markit.
Ukraine's central bank confirmed non-payment, saying it would sell foreign currency to Naftogaz to enable it to pay bondholders. And Prime Minister Arseny Yatseniuk told a government meeting: "The government together with Naftogaz has begun the procedure for repaying the amount of $1.67 billion. The whole amount will be repaid."
But market players were critical of the government, which has repeatedly assured investors it would honour the issue on time.
"They had plenty of time to organise themselves to make this payment. This looks very last minute now," Standard Bank analyst Tim Ash said. "Investors ... don't appreciate the white-knuckle ride."
Naftogaz has defaulted on dollar debt before, after the 2008 global crisis, but those bonds, unlike the current ones, had not carried an explicit sovereign guarantee.
Analysts said the sovereign guarantee on the 2014 bond kicks in after the expiry of the initial 10-day grace period. That is followed by an additional grace period of around 25 days.
"I see no reason for them not to pay (on Naftogaz) unless they want to default on their sovereign bonds too," another fund manager said. (Additional reporting by Marc Jones, Karin Strohecker and Chris Vellacott; Editing by Larry King)