Kyiv taken off watch negative due to refinancing of $250 m LPN
Standard & Poor's Ratings Services on November 26, 2012, affirmed its 'B-' long-term issuer credit rating on the Ukrainian capital city of Kyiv and removed it from CreditWatch, where it had been placed with negative implications on October 29, 2012.
The outlook is stable, S&P said in a statement.
According to S&P, the CreditWatch placement reflected its concerns about Kyiv's slow progress in refinancing a $250 million U.S. dollar-denominated loan participation note (LPN) due on November 26, 2012. On November 23, 2012, Kyiv finally placed Ukrainian hryvnia (UAH) 2 billion out of the UAH 3 billion ($245 million) domestic bond with state banks largely providing the funds. S&P said that in its view the amount raised is sufficient to secure payments to LPN holders on November 26, 2012.
S&P says that the rating on Kyiv continues to reflect Ukraine's "volatile and underfunded" institutional framework, which constrains the city's financial flexibility. It also reflects Kyiv's high debt service, "very negative" liquidity, and material debt burden, with associated foreign-exchange risks. However, Kyiv's importance as the administrative and economic center of Ukraine (B+/Negative/B; Ukraine national scale 'uaA+') and the city's fairly diversified economy, with wealth exceeding the national average severalfold, support the rating.
S&P notes that the stable outlook reflects its expectation that, despite turbulent capital market conditions and a very weak cash position, Kyiv will be able to arrange the refinancing for maturing debts when necessary, as confirmed by its positive refinancing track record. The outlook also factors in the rating agency's expectations of a continued recovery of Kyiv's operating financial performance through 2013, supported by a recovering economy and continued operating support from the sovereign, which should allow the city to avoid further debt accumulation.
According to S&P, positive rating actions would hinge on stronger budgetary performance, with operating surpluses approaching 7-8% in 2012-2013 or improved terms of borrowing or refinancing that resulted in stronger self-financing capacity and a lower debt burden. The continuing reduction of the payables of Kyiv's related entities, which would lead to lower contingent risk, would also support ratings upside.
S&P says it could take a negative rating action if the city's operating performance dipped into the red, which would put Kyiv's capacity for interest payments under pressure, especially if state support weakened. These factors would most likely also change the rating agency's assessment of the city's quality of financial management.