But the state energy giant and the government declined to say whether the full bond UA020207868= would be repaid or not by Wednesday's deadline.
Many investors see the creaking behemoth, often at the centre of gas supply rows between Ukraine and Russia, as a reflection of the country's creditworthiness as its squabbling political elite try to fight a deep economic crisis.
"Naftogaz will pay the coupon today. There are no problems with the coupon," Energy Minister Yuri Prodan said on the sidelines of a regular cabinet meeting.
The half-yearly coupon payment is worth around $20 million.
Analysts and some bondholders have said payment of the coupon would show Naftogaz' willingness to settle amicably the restructuring of its entire foreign debt.
Naftogaz' chairman Oleh Dubyna and acting Finance Minister Ihor Umanksy were in London on Wednesday talking to debt holders about a plan to issue a 5-year bond worth $1.65 billion in exchange for the Eurobond and other bilateral debts. [ID:nLT632248]
"We believe there is a very high probability that bondholder committee members will participate in the restructuring on the offered terms ... the last coupon payment due today is a precondition for the process to go smoothly," Renaissance Capital analyst Petr Grishin said in a note.
NEGATIVE FOR SOVEREIGN
Even if the restructuring is agreed, the chaotic and rushed way in which it had been communicated and pursued, as well as the expected default, will leave a stain on Ukraine's record with debt holders and may make it more difficult for the ex-Soviet state to borrow in the future.
The government -- its finances overstretched and relying on a $16.4 billion International Monetary Fund bailout -- wants 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," said 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. [ID:nN28520869] [ID:nLN627732].
Fitch has said however that Naftogaz' default would not be considered as a sovereign default by the state.
Many questioned why Ukraine wanted to renegotiate repayment terms for Naftogaz's debt when the IMF has just disbursed a $3.3 billion tranche of its loan programme, which it said could be used to cover Naftogaz' debt obligations.
Moody's said in comments issued on Monday that political turmoil ahead of a presidential election on Jan. 17 will likely influence developments in the economy far more than the government's ability to pay.
"It certainly appears the government has enough resources to finish the necessary recapitalisation of the banking system ... make its own $1.2 billion in debt payments for 2010, and also cover Naftogaz's upcoming $500 million principal payment," said Jonathan Schiffer, a Vice-President in Moody's."We would caution against extrapolating from the government's net asset position to draw conclusions about its future payments behaviour," he said, calling the Naftogaz restructuring "yet another piece of negative economic news".
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