Sunday, October 18, 2009

Naftogaz Defaults, Bondholders Rejoice

A little update on my post a few weeks back on Naftogaz. As "kind of" expected, the company failed to make the principal payment on its $500 million bond issue back on Sep 30, generating what the rating agencies called a "technical default".
They did come up with the interest coupon, however. LINK

Since then, and also as expected, the company held a bondholder vote, and with an overwhelming majority (92%), holders of Nafto paper agreed to swap their "defaulted" paper for the to be issued 9.5%, 5 year, govenment-backed bond that Naftogaz was offering in exchange. Even the dissident group went along. LINK

A few lessons here. One is that despite the showdown and drama that played out in the press, there was no real interest in any other outcome. Bondholders weren't necessarily obsessed with collecting their money, just getting a decent deal in the exchange (which they did). It's not like there are ton of better opportunities elsewhere.

The next lesson is that not all defaults are created equal. There is a huge difference between this "pseudo-default" (although it was defined as such for effects of making good on CDS), and defaults such as the Argentine default in 2001 and the recent Ecuadorian default. No one's going to lose money on this one, and I wouldn't be surprised if the new Naftogaz bonds were trading above par in less than a year.

Finally, if Ukraine wants to be a player in the capital markets, they really have to get their act together. This back and forth about paying or not paying and letting everything go down to the last minute (and beyond) was totally unnecessary and counterproductive. A little professionalism and foresight go a long way towards reducing country risk (and hence interest expenses). Ukraine could certainly take a lesson from Russia in this aspect, as much as it may pain them to do so.

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