Fitch upgrades Naftogaz 'CC' rating following Eurobond restructuring

MOSCOW. Dec 20 (Interfax) - Fitch Ratings has upgraded the Long-Term Issuer Default Rating (IDR) assigned to Ukraine's Naftogaz CC' from 'RD' (Restricted Default) following the completion of its Eurobond restructuring, Ukrainian media reported, quoting the rating agency.

Fitch affirmed the company's senior unsecured notes at 'C'; the Recovery Rating has been revised to 'RR6' from 'RR5'.

Fitch said that "even after the restructuring, the company's credit risk remains very high and a default of some kind appears probable." Naftogaz's amended Eurobond payment schedule assumes principal payments starting from July 2024, and the company's projected liquidity remains extremely weak and unpredictable, given very high operational risks in Ukraine amid the military operation, "slow payments for gas and limited external funding options."

The Naftogaz rating is in line with the sovereign's rating. Naftogaz's links with Ukraine are fairly strong, although availability of state support may be affected by Ukraine's weak credit position, the agency said.

It said Naftogaz's gas production infrastructure remained operational. Management expects that only moderate amounts of gas will need to be purchased from Europe and from other domestic suppliers in 2023. However, the gas balance situation hinges on stable domestic production, and any significant operational disruption, particularly during winter, could lead to the necessity to buy expensive gas in Europe.

Poor receivables collection may continue to negatively affect Naftogaz's cash flows. Most overdue receivables are from district heating companies.

"Assuming no state support, Naftogaz is likely to generate negative free cash flow in 2023 and 2024," Fitch said.