KIEV, April 25 ??“ Ukraine??™s sovereign debt prices fell on Tuesday after Fitch Ratings agency had downgraded Naftogaz Ukrayiny, the country??™s largest oil and gas company, following reports of a looming financial crunch.

This put downward pressure on the JP Morgan EMBI+, an index tracking key emerging debt markets, which had slipped 0.10% in morning trading in London shortly after the announcement.

Ukraine??™s debt prices fell 0.57% after Fitch had downgraded Naftogaz, the country??™s biggest taxpayer, suggesting that some investors had started to sell Ukrainian bonds.

???Ukraine has been one of the biggest losers for the sector??¦ due to the downgrade,??? an emerging debt market analyst said.

Fitch downgraded Naftogaz??™s local and foreign currency Issuer Default Ratings to ???B+??™ from 'BB-' due to the company??™s deteriorating financial condition.

The senior unsecured rating on Naftogaz??™s $500 million Eurobond maturing in 2007 is also downgraded to 'B+' from 'BB-'. The outlooks for both ratings remain negative, Fitch said.

???The downgrade reflects expectations that Naftogaz could be facing a serious liquidity constraint as the company seeks to cope with rising natural gas costs in a regulated domestic price environment,??? Fitch said.

The downgrade is the first action taken against Naftogaz after the government has admitted earlier this month the company would run a financial gap unless spending on foreign projects is cut.

The action will put pressure on Naftogaz by increasing the cost of its borrowing, a burden for the company that has been increasingly relying on loans in its day-to-day operation.

Naftogaz reported losses of about $500 million in the first quarter after gas import prices increased almost 90%, while the government had not allowed the company to hike domestic prices.

Naftogaz warned it could face more than $1.5 billion in losses for the entire year, unless domestic gas prices are allowed to increase. Naftogaz's profits in 2004, the last year for which audited figures are available, totaled $1.24 billion.

Naftogaz's tax burden increased by 90% in 2005, while income grew by 11.7% over the same period, as measured under Ukrainian GAAP, Fitch said.

???Of additional concern to Fitch are reports in the press that Naftogaz has accumulated debts of around $700 million for natural gas supplied by RosUkrEnergo in February and March,??? Fitch said. ???Naftogaz was forced to sell gas in the domestic market at prices lower than the acquisition price.???

Media reports suggested that RosUkrEnergo moved to cut gas supplies to Naftogaz in April by 50% due to the debts. Naftogaz officials, although admitting unspecified debts, have denied the reports that the gas supplies had been reduced.

Fitch warned it would further downgrade Naftogaz??™s rating if the company fails to adequately offset rising costs resulting in a further deterioration of the company's key cash flow.

However, the outlooks could return to ???stable??™ from ???negative??™ if Naftogaz demonstrates an ability to offset rising costs either through a renegotiation in prices, an increase in transportation tariffs or an ability to pass on these costs to domestic end-users, Fitch said.

Ukraine mulls $500 mln Eurobond

Ukraine may issue at least $500 million in Eurobonds this year to finance its budget deficit, Deputy Finance Minister Vitaliy Lisovenko said.

"We'd like to borrow at least $500 million on the foreign capital market," Lisovenko said, adding that Ukraine has also reached a preliminary agreement to borrow $500 million from the World Bank.

Ukraine plans to raise between $2 billion and $2.5 billion with external and internal borrowing and with privatization this year to finance its budget deficit. (jp/ez)