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August 21, 2009 1:36 pm

Naftogaz activist bondholder attempts to rally investor opposition to restructuring

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This article is provided to FT.com readers by Debtwire—the most informed news service available for financial professionals in fixed income markets across the world. www.debtwire.com

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A company registered in Central America and backed by Eastern European investors is trying to corral enough Naftogaz bondholders to block any attempts at restructuring by the Ukrainian government, Debtwire reports. The natural gas giant managed to reschedule USD 2bn in debt owed to local banks this year but has yet to address its foreign short-term obligations.

Belize-registered Corlblow sent a notice to bondholders on Tuesday (18 August) inviting them to come forward and cooperate, said Philipp Thomas, an associate at Corlblow’s Luxembourg-based legal advisor, Aequi-Libria. Corlblow currently holds around USD 11m of the company’s USD 500m 8.125% bonds due 30 September, Thomas said.

Corlblow hopes to secure the support of at least 10% - if not 25% - of Naftogaz noteholders over the next week to secure a blocking position should the borrower seek to restructure, Thomas said. If the Corlblow faction stymies a consensual restructuring or rescheduling, the state-owned energy company would have two choices – pay the USD 500m bond when it matures next month or fall into default, he continued.

Should the Ukrainian government and Naftogaz choose the latter option, Aequi-Libria is ready to argue that a default by the company is tantamount to a sovereign default. Recent ratings agency actions clash with that contention.

Moody’s downgraded Naftogaz one notch to ‘Caa2’ on 7 August and subsequently stated that a restructuring would constitute a default by Naftogaz but did not indicate a heightened probability of default on the country’s sovereign debt. That jibes with an earlier statement by Fitch Ratings following the agency’s downgrade of Naftogaz to ‘CC’.

A call to action

Corlblow’s organizational efforts mark the minority bond holder’s second agitation in the past three weeks. Earlier this month, the firm complained about alleged market manipulation of the company’s bonds to the UK’s Financial Services Authority (FSA) and Serious Fraud Office, as well as the Luxembourg Stock Exchange where the Naftogaz bond is listed.

Tuesday’s message was communicated via the Naftogaz bond’s trustee, Bank of New York Mellon, and agent, Standard Bank. “A noteholder [...] would like to contact all other noteholders in order to discuss forward strategy for repayment of the notes and possible directions to the trustee,” the notice read.

Naftogaz has not yet sent an official notice to noteholders about its intention to restructure the USD 500m 8.125% notes, said a source close to the noteholders. Nevertheless, a Ukrainian government resolution containing a suggestion to restructure Naftogaz debt came into force on 28 July.

Ukraine’s acting finance minister, Ihor Umansky, told reporters on Wednesday (19 August) that a timetable for a potential restructuring should be ready by the end of this week and that the company will go out to investors with its proposal after that, according to newswire reports. The Naftogaz bond is quoted in the low 80s, said a London-based trader.

Naftogaz declined to comment, but a person familiar with the company’s internal processes said its financial experts, together with government representatives, are actively working on the matter. The process is ultimately controlled by Prime Minister Yulia Tymoshenko and is affected by constant changes in directives, the person said.

Beneath the veil

Corlblow is trying to ensure it has enough investor support to block any attempt by the government to modify the terms and conditions of Naftogaz’s Eurobond before the repayment date.

The firm opposes any restructuring or rescheduling because of uncertainties regarding the domestic political situation in Ukraine, Thomas said. In a default event, Aequi-Libria’s lawyers would assert the Ukrainian state is liable for the company’s debt based on the legal concept of piercing the corporate veil, he said.

The advisor would argue the matter on the grounds that Ukraine leases its gas pipeline to Naftogaz on non-commercial terms and is constantly interfering in the company’s matters, Thomas continued. The government sets Naftogaz’s domestic gas charges, which have played a significant part in the company’s adverse financial circumstances, he noted.

Previous assurances from Yulia Tymoshenko and provisions in the national budget for a government bail-out of Naftogaz will also be used to back the legal claim, Thomas said.

Despite the bond’s low trading price, Ukraine has enough liquidity to pay off Naftogaz’s Eurobond on its 30 September maturity date, the source close to the noteholders told Debtwire last week. But the matter is being decided at a high political level and is being influenced by approaching presidential elections in January 2010, said a London-based credit analyst.

“The Ukrainian government is interested in restructuring in light of a budget deficit and upcoming elections,” the analyst said.

Refinancing plans

The USD 500m Eurobond is the main redemption facing Naftogaz this year because it has negotiated extensions to credit lines from state-owned banks Oschadbank and Ukreximbank. These banks lent Naftogaz the equivalent of more than USD 2bn, with original maturities scheduled for December 2009, as previously reported by Debtwire.

Naftogaz should not have difficulties negotiating any rescheduling it may need with its other bilateral lenders, including Deutsche Bank and Credit Suisse, said a source familiar with the situation. Credit Suisse and Deutsche Bank have the largest foreign bilateral exposure to Naftogaz. The combined debt the energy company owes the two banks is close to USD 1bn, as reported.

“There is optimism that a mutually satisfactory arrangement could be found [with banks] to keep all sides happy,” the source familiar with the situation said.

Deutsche Bank is exposed to Naftogaz via two SPVs – Linton Capital and Parbeck Capital – with respective loans worth USD 163m and USD 218m, as of the beginning of 2009, said a source close to the energy company. The first loan amortises semi-annually until final maturity in April 2012, and the second matures in August 2012, he said.

A USD 550m Credit Suisse facility matures in December 2011, with the first repayment of USD 183.33m due in December 2010, according to the source. Naftogaz also has a USD 220m loan from a Cyprus-registered subsidiary of Depfa Bank maturing in December 2010.

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