Standard & Poor's Ratings Services on April 20, 2015, lowered its long-term counterparty credit rating on Ukraine-based PrivatBank to 'CCC-' from 'CCC'.

The outlook is negative, S&P said in a statement.

The 'C' short-term counterparty credit rating was affirmed.

According to S&P, the downgrade follows the lowering of the rating agency's long-term sovereign credit rating on Ukraine to 'CC' on April 10, 2015. S&P says that sovereign downgrade indicates that Ukraine's default on its foreign currency central government debt is a virtual certainty. The consequences of a sovereign default are unpredictable, but the rating agency considers that they could be severe for the financial profile of any commercial bank in Ukraine, even a strong one like PrivatBank in the local context.

The sovereign rating action followed the Ukrainian government's announcement of its intention to restructure its foreign currency commercial debt (eurobonds). The government intends to commence debt-restructuring talks with external commercial creditors soon, and conclude them by the end of May. The government's objective is to cover $15.3 billion in external financing needs as part of a revised $40 billion financing plan approved by the International Monetary Fund (IMF). S&P says it would expect to classify an exchange offer or similar restructuring of Ukraine's foreign currency debt as tantamount to a default.

S&P says it sees increasing uncertainty that PrivatBank would be able and willing to repay its $200 million eurobond in full and on time when it matures in September 2015, especially if the sovereign were to default on some of its obligations beforehand. It is possible that PrivatBank would decide not to repay its eurobond, after consulting with the National Bank of Ukraine and the IMF, to preserve its foreign currency for meeting any possible withdrawals of foreign currency deposits.

PrivatBank's business position has deteriorated to adequate from strong. S&P forecasts that the bank's profitability would decline significantly in 2015 and 2016, falling below that of international peers, due to the creation of a large amount of additional provisions. As a result, the rating agency revised its assessment of PrivatBank's stand-alone credit profile (SACP) to 'ccc+' from 'b-'.

S&P says it believes that PrivatBank can withstand a foreign currency sovereign default, based on the results of its liquidity and capital stress tests, but that its financial profile would weaken substantially in such a case.

In S&P's view, PrivatBank would pass a sovereign foreign currency default stress test. As a result, the rating agency believes that the bank would retain positive equity in such a scenario and that its liquidity would be sufficient, either because of some type of deposit freeze, or continuous provision of refinancing loans from the National Bank of Ukraine in local currency. The rating agency says it understands that the banking regulator introduced a three-year grace period for banks' noncompliance with minimum capital requirements, as long as the banks comply with other prudential norms and create adequate provisions. S&P says it understands that PrivatBank's capital adequacy ratio under local accounting standards is approaching the minimum requirement of 10%.

According to S&P, PrivatBank's ability to withstand the sovereign foreign currency stress test is supported by:

The central bank's continued provision of local currency liquidity to the banking system, including PrivatBank; as well as

PrivatBank's status as one of few systemically important banks in Ukraine;

Its very low exposure to Ukraine sovereign debt and state-related enterprises;

Better reported asset-quality metrics than the system average, with nonperforming loans (NPLs; loans more than 90 days overdue) that S&P estimates at about 8% of total loans on December 31, 2014, which is significantly below the rating agency's estimate of over 15% for the system;

High coverage of NPLs by provisions of over 100%, which helps absorb expected losses; and

A planned UAH 5 billion (about $238 million) shareholder capital injection in 2015 that will help PrivatBank maintain its solvency despite an economic downturn.

S&P says the negative outlook on PrivatBank mirrors that on Ukraine, based on the rating agency's view that sovereign risks in Ukraine strongly influence PrivatBank's creditworthiness.

If PrivatBank defaults on its eurobond due in September 2015, or announced that it would not pay this bond in time and in full, S&P says it would lower the ratings to 'SD' (selective default).

If PrivatBank's liquidity weakens below the level that, in S&P's view, would allow it to withstand a sovereign default, or if it does not receive the expected capital injection and liquidity support from the central bank, the rating agency might consider that the bank would not pass a sovereign stress test and lower the ratings.

Any positive action would be contingent on the easing of economic and industry risks in Ukraine, S&P said.