Fitch Ratings has upgraded the city of Kyiv's Long-Term Foreign Currency Issuer Default Rating (IDR) to 'CCC' from 'D', reads a report on the rating agency's' website.

Key rating drivers

High

The upgrade of Kyiv's Long-Term Foreign currency IDR follows the completion of Kyiv's distressed debt exchange (DDE) on December 22, 2015. The city's ratings' upgrade reflects lowered debt burden, relived refinancing pressure and satisfactory fiscal performance.

Fitch treats completion of the city of Kyiv's $ 550 million eurobond restructuring as an executed exchange in accordance with its DDE criteria, leading to today's upgrade of the city's ratings.

The agreed terms of restructuring in our view materially reduce investors' compensation. It includes a 25% reduction on the bond's principal, interest was cut to 7.75% and maturities extended to 2019 and 2020. According to original schedule Kyiv's $ 250 million eurobond final maturity was November 6, 2015 and its $ 300 million eurobond July 11, 2016.

As the new eurobonds will be issued by the Ministry of Finance of Ukraine, which will be liable for this debt repayment, we withdraw senior debt ratings of Kyiv's distressed eurobonds. Prior to that, national parliament granted the city the right to suspend the repayment of its eurobonds in May 2015. Kyiv was mandated to extend the maturity of its external debt as part of a broader exercise to support Ukraine's public sector finances and external liquidity following the introduction of the IMF's Extended Fund Facility for Ukraine in March 2015.

Fitch has also upgraded the city's Local-Currency IDR to 'CCC' from 'D' following restructuring of its domestic bonds. Kyiv has extended the maturities of its domestic bonds by 12 months, from the original maturities of October 1 and December 7, 2015. The city's decision to extend maturities was approved by the national government and the restructuring did not involve a write-down of principal or a decrease in coupons.

Medium

Fitch expects Kyiv's budgetary performance to remain volatile due to overall weakness of sovereign public finances, lower predictability of fiscal policy and short planning horizon, exacerbated by negative macro-economic trend. Fitch expects contraction in Ukraine's economy by 11.6% y-o-y in 2015, which negatively affects the city's fiscal capacity.

Rating sensitivities

Any adverse change affecting the city's ability and capacity to refinance or repay its domestic bonds would lead to a downgrade.

Material reduction in refinancing pressure along with sustainable restoration of the city's financial flexibility would lead to an upgrade.

The rating actions are as follows:

- Long-Term Foreign Currency IDR: upgraded to 'CCC' from 'D'

- Long-Term Local Currency IDR: upgraded to 'CCC' from 'D'

- National Long-Term Rating: upgraded to 'BBB(ukr)'/Stable from 'D(ukr)'

- Senior unsecured Eurobonds (ISIN XS0233620235/US225407AA34 and XS0644750027/ US50154TAA34): withdrawn

- Senior unsecured domestic bonds: upgraded to 'CCC' from 'D'

- Senior unsecured domestic bonds: upgraded to 'BBB(ukr)' from 'D(ukr)'