Ukraine’s state-owned gas monopolist Naftogaz postponed a placement of $500mn Eurobonds slated to happen on November 14, due to poor demand on the international capital markets, the company announced.

The government approved the company’s plan to issue bonds shortly after a new deal with Ukraine’s main donor the International Monetary Fund (IMF) was agreed at the start of October. The government itself immediately issued a $2bn Eurobond to shore up its funding needs and cover debt redemptions through to the middle of next year. However, Naftogaz did not get such a warm reception.

The company has been on a roadshow for the last week and received $700mn in bids for the five-year notes, but investors were asking for more than the 10.9% target interest rate due to concerns over Ukraine’s reliability.

“Unfortunately Ukraine is now paying the price for the long delay in getting IMF lending back on track. It explains why the recent Eurobond issue became so expensive for Ukraine — ridiculous really to think it was priced a couple of hundred bps over Pakistan, which is not even on an IMF programme and has much worse ratios,” said Tim Ash, senior sovereign strategist at BlueBay Asset Management, in a note to clients.

“What it says is the market is a) untrusting of the commitment (why the 18 month delay and very damaging in terms of credibility) to the IMF programme; b) worried about the bunching of borrowing in the run up to [presidential and parliamentary] elections in 2019; c) those elections themselves and the uncertain outcome. The fact that some of the potential candidates have been banging the IMF has not gone down with the market,” Ash added.

To add to these more structural concerns the bond offer was particularly badly timed after oil prices tumbled 7% on November 14, following US President Donald Trump’s Twitter threats against Saudi Arabia where he threatened to start a production war and bring oil prices down for the benefit of the US consumer. The drop in oil prices hurt energy assets across the board.

A week earlier in the run up to the roadshow Fitch Ratings rated the bonds at the same level as the sovereign, awarding them a B- rating.

Naftogaz CEO Andriy Kobolev told a conference in Kyiv on November 13 that he wants to replace the state energy company’s $2bn debt portfolio with lower interest rate Eurobonds. The company has also announced a $1bn investment programme to boost its own production of gas in the hope of making Ukraine independent of energy imports.

Naftogaz’s aborted sale will impact the wider market. Ukraine’s state-owned rail operator Ukrzaliznytsia was also planning to issue Eurobonds, but those plans are now likely to also be canned.

The government will have to take note as the rejection of the Naftogaz bond – from one of Ukraine’s better run companies – suggests the state will have a harder time raising more debt on the international markets next year. While its immediate funding needs are now covered, the state has some $7bn of bonds coming due next year and even with a new IMF programme in place it will have to tap the market in the new year to refinance part of that debt.

Adding to the uncertainty the new IMF deal has been agreed but yet to be finalised. One of the conditions on the deal is the government pass an IMF-compliant budget with a deficit of no more than 2.5%. The draft budget has already passed two readings but the third and final reading is due at the end of November or start of December. The government has also promised the fund to hike domestic gas tariffs – a promise it has already reneged on once last year. Only if the government sticks to all its commitments will the bond market entertain new issues.

“I guess the plus factor from the above is that the message from the market is now loud and clear - we will only finance you if you stay on track with the IMF. Therein it is really important for the Rada to finally sign off on an IMF compliant budget for 2019 - no messing around with sneaking in a broad coverage ECT,” Ash added. “Message to Ukrainian policy makers = no room for complacency. And I cannot underscore how damaging that decision was to screw around with the IMF in terms of gas pricing. Gas prices should have been increased as had been agreed as part of the 3rd review under the EFF back in April 2017.”