March 31, 2008 / 12:18 PM / 10 years ago

UPDATE 2-Ukraine's Naftogaz eyes another bond waiver-source

(Adds Ukrainian govt, Naftogaz, details)

By Sebastian Tong

LONDON, March 31 (Reuters) - Ukraine’s ailing state energy firm Naftogaz will seek another bondholders’ waiver to avoid a technical default on its $500 million eurobond UA020207868=, a source said on Monday.

The company is expected to begin contacting its foreign creditors soon to secure an extension of two months for the publication of its 2006 financial results — due on Monday after an earlier bondholder waiver was obtained in February.

“They won’t be able to publish the financials today and will need another two to three weeks to get the auditor sign-offs,” a source familiar with the situation said.

Naftogaz declined to comment.

The firm went into technical default on the 8.125 percent Eurobond due 2009 after failing to provide audited 2006 financial results and has missed several deadlines to do so.

It has managed each time to obtain an extension from its creditors, averting a default that analysts say could cost the company a combined $2.5 billion.

Naftogaz’s financial health has been uncertain since it failed to pass on to consumers steep gas price rises from Russia and lost out on revenues when two gas transit intermediaries were introduced in 2006.

Ukraine’s government, in power since December last year and long critical of the gas middlemen, threw Naftogaz a $2.4 billion lifeline in January in the form of sovereign guarantees.

“I believe, as long as there is a government guarantee on the bonds, the reaction of the market would be muted and any price weakness would be seen as a buying opportunity,” said Okan Akin, Managing Director at Bear Stearns Fixed Income Research.

The government reached a political agreement with Moscow to do away with intermediaries RosUkrEnergo and UkrGazEnergo earlier this month, though Kiev officials say that Russia’s gas export monopoly Gazprom still wants to hang on to RosUkrEnergo.

It has yet to sign a detailed contract for 2008 supplies.

Up until 2006, Naftogaz had been buying Russian and Turkmen gas under contracts signed between governments which allowed it to supply Ukrainian consumers without paying Value Added Tax.

After 2006 it not only lost the tax privileges, but also the right to supply industry, a more profitable enterprise, selling only to local utilities at subsidised prices. That reduced a large part of its usual revenues.

Ukraine’s First Deputy Prime Minister Oleksander Turchynov, declined to confirm Naftogaz’s request for an extended deadline.

But he linked the delay in presenting the audited accounts to the company’s better financial outlook, as anticipated by the government, because of the agreement to cut out intermediaries. “As the system was built on the basis of intermediaries, Naftogaz was blocked from the possibility of receiving enough profit to cover even its debts,” Turchynov said.

He said getting rid of UkrGazEnergo allowed Naftogaz full access to the domestic market, “which significantly improves its financial situation.

“It can earn profits, as it did in previous years, and its creditors can get a realistic guarantee of getting back their credits without problems or delays,” he said. (Additional reporting by Carolyn Cohn in London and Natalya Zinets in Kiev; Writing by Sebastian Tong and Sabina Zawadzki; Editing by Erica Billingham)

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