KIEV, Sept. 30 - Naftogaz Ukrayiny on Wednesday failed to redeem its $500 million eurobond, but agreed to pay a $20-million coupon to encourage international bondholders to swap the debt into a new five-year bond.

“Naftogaz is to pay the coupon by the end of the day,” Fuel and Energy Minister Yuriy Prodan told reporters Wednesday.

Naftogaz, the main shipper of Russian natural gas to markets in the European Union, is battling the default option by holding talks with bond holders seeking to restructure this and some other bilateral debt.

Naftogaz, which is facing serious financial crunch, resorted to emergency borrowing from the National Bank of Ukraine to make gas payments earlier this year to Russia’s Gazprom.

There were fears that Naftogaz’s default may provoke problems for European gas supplies later this year, but the company had dismissed the allegations.

Naftogaz seeks to swap $500-million Eurobond and other debts into $1.65 billion Eurobond that will be issued to absorb the debt and will be backed by guarantees from the government.

The new bond is to pay 9.5% coupon annually and will mature on September 30, 2014, compared with 8.125% coupon paid by the Eurobond that was due to mature on Wednesday.

“We are conducting meetings with our creditors and frankly I am convinced that our proposal will be accepted,” Oleh Dubyna, Naftogaz’s chief, said on Wednesday during a visit to London for talks with creditors, according to the Financial Times. ”We already have some positive feedback from some banks, so I think everything will be fine.”

Meanwhile, Naftogaz received a big boost late on Wednesday, when a group of Russian investors that had pledged to block restructuring announced it would now accept.

Belize-registered Corlblow said that “following frank discussions” with Naftogaz, it “ceases its opposition to the proposed restructuring,” the Financial Times reported.

Investors have been given an October 8 deadline to avoid penalties, and until October 19 to accept or reject Naftogaz’s restructuring offer.

With Naftogaz’s debt considered quasi-sovereign, a default by Naftogaz would be a first for a sovereign company in Eastern Europe this year, complicating plans for the government to raise more money later this year.

The government, which depends on $16.4 billion lifeline from the International Monetary Fund, plans to issue its own sovereign Eurobond as early as this year and has plans to issue $1.1 billion next year.

“If Naftogaz restructures quickly and cleanly, I would expect minimal impact, although it is still negative for the sovereign," Reuters reported citing Marc Balston, an emerging debt strategist at Deutsche London.

"It is going to be difficult for Ukraine to issue in the very near future, it will more likely be in the first quarter and the question is whether the market will be as strong as it is now. They might have missed an opportunity," he said.

Both Fitch and Moody's have downgraded Naftogaz's ratings. They say that since a restructuring of its foreign debt including the $500 million Eurobond is to be settled in October after Wednesday's maturity date, Naftogaz will effectively be in default because of non-payment.

Fitch has said however that Naftogaz' default would not be considered as a sovereign default by the state. (ft/ez)