Ukraine’s Naftogaz affair a stark reminder of the important of due diligence

Institutional investors that own debt issued by Naftogaz, Ukraine’s state-owned gas firm, are waiting to learn their fate as the $500m worth of Eurobonds September 30th due date rapidly approaches. While some may have initially assumed that continued IMF largesse–$10bn of a $16.4bn standby loan program has now been disbursed–would render restructuring talk kaput, the country’s acting finance minister continues to insist that a restructuring will go ahead. Meanwhile, prices for the corporate debt, once considered almost sovereign in nature given the company’s government ties, fell over twenty percent last week, prompting cynics to speculate that the government was trying to manipulate prices downwards and hence make them easier to pay.  Finally, Moody’s, while downgrading the debt in question to Caa2 from Caa1, announced on Friday that “the probability of extraordinary government support to prevent a default should now be classified in the low rather than medium category.”

The real lesson for investors stemming from the sordid affair, however, relates to due diligence, or the lack thereof. As Financial Times reported on Friday:

“Many bank sales and analyst teams visiting Ukraine in recent years have been surprised to discover – after they had already taken positions on the company – that Naftogaz does not itself have Ukraine’s vast and prized natural gas pipeline [linking Russian gas to Europe] on its balance sheet as an asset, or collateral. Instead, the company merely manages the state-owned pipeline.”

Ukraine, Pakistan to receive more largesse

Per the Financial Times, under a soon-to-be-unfrozen IMF plan, “Kiev will use half of a second $2.8bn (€2.1bn, £1.9bn) tranche to service its budget deficit. The rest will be directed towards traditional currency stabilisation and balance of payment needs.”  Bonds markets reacted well to the news; Ukraine’s 6.58% dollar bonds due 2016 rose on Friday, pushing the yield down 54.4 basis points to 17.162%, the lowest since Oct. 9.

Meanwhile, Pakistan won commitments for $5.28bn in aid over two years from more than 20 countries in order to help stabilize its rapidly fleeting economy (Pakistan’s rupee plunged 22% last year and the benchmark stock index tumbled 58%) and support investment in healthcare, education and infrastructure development.  The Pakistan Donors’ Conference, co-hosted over the weekend by Japan and the IMF in Toyko, also reaffirmed $15bn (€11.5bn, £10.1bn) already committed to existing aid programs.  The new funds come on top of a $7.6bn loan provided by the IMF in November to help Pakistan avoid defaulting on its foreign payments.

Pakistan hopes to raise $500 million in the next 12 months through bonds aimed at Middle East investors as a debt sale in other overseas markets would be too expensive, according to central bank Governor Syed Salim Raza.  Such Islamic bonds, known as sukuk, comply with Shariah law by using asset returns to pay investors instead of interest.  Sales of the securities may rise to a record this year, led by issuers from the Persian Gulf, as higher yields attract investors, Saudi Arabia-based NCB Capital opined last month.