Naftogaz Ukrainy, the indebted national energy company of Ukraine, is facing a December 31st deadline for submitting its 2006 financial report as stipulated by its international creditors, and risks being pushed into a technical default should it fail to adhere to this regulation. The UK-based investment funds Ashmore and BlueBay together hold 40% of Naftogaz’s debt, and on Friday representatives from the firms held meetings with both Tymoshenko’s and Yushchenko’s people on the issue. Jules Green from Ashmore stated during a press conference:
“We are the creditors of NAK Naftogaz and we came to the Verkhovna Rada [Ukraine’s parliament building] in order to communicate that there exists a serious risk of the declaration of a technical default of Naftogaz. If before the 31st of December an audited financial report is not produced and presented, then a technical default will be declared.”
He went on to say that in the event of a default, “the owners of the obligations can demand a return of [their] money.”
Naftogaz has about $2.2 billion in debts and budgeted around $800 million for debt repayment and interest fees for 2007. It recently secured a $52 million loan from Ukraine’s state-owned Oshchadbank for debt restructuring and asserted that it plans to repay $67 million in loans this December. However, besides regular repayment of its debts — which account for about 15% of Ukraine’s total national debt — terms of the international lenders also included regular financial reports, something Naftogaz has apparently been struggling with.
Ashmore and BlueBay are also both nervous over the company’s prospects in 2008, especially in light of the significant price increase in natural gas recently negotiated with Gazprom. However, after meeting with representatives from the presidential secretariat and with Yulia Tymoshenko herself, the creditors were slightly more optimistic:
“For the first time in its history, the Ukrainian government will find a solution to these [financial] problems,” in the form of the making available on the side of Ukraine “sovereign” government guarantees relating to the debts of Naftogaz.
Earlier, right after the two failing votes for Tymoshenko [for the post of Prime Minister], in the cupolas of the Verkhovna Rada crept a rumor, in the form of Tymoshenko being forced to refuse, in particular, from the claim on the position of head of Naftogaz, which would divert BYuT from the coalition agreement.
Naftogaz responded by calling the news of impending financial trouble “speculation” generated by various “political forces” and urged its partners and investors not to worry. According to the company, the problems with finances arose from an earlier management team, and changes have been implemented for the better:
“Naftogaz Ukrainy is continually removing the consequences of the financial crisis [that lasted from] 2005 through the first half of 2006, and during this year [the company] is gradually reaching a financial balance, strengthening the position of the company in both internal and external markets,” says Naftogaz’s announcement.
The document noted that “the increased health of Naftogaz’s finances began with the arrival in August 2006 of a new management team to the leadership of the company.”
On Thursday — the day before the announcement by the British creditors — Naftogaz submitted its deficit-free financial plan for 2008 to its auditing firm, Ernst & Young. This was apparently one hurdle in the publication of the company’s 2006 IFRS report, suggesting that with some effort the financial information will get published within the necessary time frame. One thing that is not clear, however, is if the 2008 plan has to be approved by the cabinet before the 2006 report can be published. If so, this could create significant problems due to the political instability currently permeating Ukraine’s government.
It sounds like Tuesday has been pegged for not only another PM vote for Tymoshenko, but also for votes on ministry heads and cabinet makeup. Should problems arise then, when a new government gets formed is up in the air — Yushchenko may be away from the country, and then we are pushed into the New Years / Christmas holidays, where no work gets done.
A delay in cabinet approval of the financial plan would be bad news for Naftogaz, especially if, indeed, as asserted (and as is generally accepted), the company is starting to become more financially viable. A default after the new year would be a rough start for the new Fuel and Energy Minister (rumored to be Yuri Prodan) and the Naftogaz leadership.