Defaults: Naftogaz deal offers new solution

Credit default swap holders are playing an increasingly important role in the restructuring of distressed debt issuers in central and Eastern Europe. With more companies likely to run into trouble as the region’s economic woes continue, advisers are having to negotiate with both physical debt owners and CDS holders; and they are coming up with ever more complex solutions.

Latest off the block was Ukrainian energy company Naftogaz effectively exchanged its entire foreign bond and loan liabilities into a new $1.6 billion Eurobond, guaranteed by the Ukrainian government, which ultimately created a sovereign risk instrument deliverable into a corporate CDS auction – a world first.

Technical default

Andrew Burton, director, liability management, at Credit Suisse, which oversaw the process, says that the involvement of CDS holders undoubtedly added a level of complexity to the restructuring once Naftogaz had entered into a technical default on a $500 million Eurobond that matured at the end of September. This meant that the restructuring had to address the needs of both the physical holders of the bonds and those investors with purely derivative exposure to Naftogaz.