Fitch Ratings placed Tuesday OJSC Naftogaz of Ukraine's Long-term local and foreign currency Issuer Default Ratings of B minus on Rating Watch Negative
The Rating Watch Negative (RWN) reflects Fitch’s near-term concerns regarding a combination of factors: an inadequate level of state subsidies for Naftogaz, accumulating payment arrears from communal heating enterprises, a decline in the industrial supply segment, the availability of foreign exchange to pay future dollar maturities, and uncertainty over the outcome of current IMF negotiations with Ukraine (‘B’/Negative).
If these factors are not addressed in the coming months, the company’s ability to meet sizeable debt maturities in H209 may be jeopardised.
The RWN does not reflect concerns about Naftogaz’s ability to pay imminent maturities (Eurobond noteholders on 3 March and Gazprom on 7 March).
The senior unsecured rating of ‘B’ on the company's $500 mln. Eurobond maturing in September 2009 has also been placed on RWN. The bond’s Recovery Rating is ‘RR4’.
Fitch is currently reviewing the strength of the Ukrainian government guarantee for Naftogaz’s foreign-held debt, which has so far resulted in an alignment of the senior unsecured rating with that of the sovereign.
The impact of ongoing domestic economic volatility and the outcome of current IMF negotiations may affect Fitch’s prospective determination of both the government’s capacity and willingness to stand behind the guarantee.
Recovery Ratings in certain emerging markets such as Ukraine are currently capped by Fitch at ‘RR4’ due to factors such as uncertainties surrounding these countries’ legal regimes being supportive of creditor rights.
‘RR4’ reflects an expectation by Fitch of average recovery (31%-50%) in the event of default.