Fitch Ratings has today downgraded NJSC Naftogaz of Ukraine`s Long-term local and foreign currency Issuer Default ratings (IDRs) to `B` from `B+, according to a Fitch press-release. This follows the downgrade of Ukraine’s sovereign Long-term local and foreign currency IDRs to `B+` from `BB-` (BB minus). The IDRs of Naftogaz remain on RWN. The senior unsecured rating on the company`s USD500 million eurobond maturing in 2009 is also downgraded to `B+` from `BB-` (BB minus), and its Recovery rating of ‘RR4’ is affirmed.

Fitch is maintaining Naftogaz’s IDRs on RWN because the company is currently in technical default of its USD500m eurobond due to non-publication of its FY07 financial statements. Additionally, the company has not yet been able to arrange financing for winter gas storage purchases; the prospective gas price agreement between Ukraine and Russia could lead to a significant rise in gas import prices to Ukraine in 2009; and Fitch believes the current level of government subsidisation is inadequate to fully compensate the company for losses in its residential sales business.

The RWN will be reviewed once the bondholders conduct a vote, which is expected before the end of the year. If bondholders again vote for a default waiver as was the case in October 2007, then the RWN could be resolved by subsequent financial disclosure. Any further rating action will depend on an assessment of the company’s business and financial conditions once the abovementioned issues are resolved.

The ‘RR4’ on Naftogaz`s USD500m eurobond reflects Fitch’s expectation of average recovery (31%-50%) in the event of default. The senior unsecured ‘B+’ rating of the eurobond is one notch above the company’s IDRs and in line with the sovereign IDR, reflecting a state budget provision to guarantee Naftogaz`s existing debt held by non-residents.

Recovery ratings in certain emerging markets such as Ukraine are currently capped by Fitch at ‘RR4’ due to factors such as uncertainties surrounding these countries’ legal regimes being supportive of creditor rights.