12:20 19.09.2016

Fitch downgrades Ukraine's City of Kyiv to 'CC'

3 min read
Fitch downgrades Ukraine's City of Kyiv to 'CC'

Fitch Ratings has downgraded the City of Kyiv's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to 'CC' from 'CCC', Fitch has said in a press release.

"The downgrade of Kyiv's IDRs follows the city's decision to extend the maturities of domestic bonds (series G), scheduled to mature on 19 December 2016. Kyiv's administration has decided to postpone the repayment of UAH1.915bn senior unsecured domestic bonds for another 360 days. The city remains current on the bond's interest payments," Fitch said.

Fitch would expect to classify such an extension as a default in accordance with its distressed debt exchange (DDE) criteria.

According to the city, the proposal does not involve any write-down of principal, and coupons payable on the bonds will not decrease, Fitch said.

The city's decision to extend the bond's maturity is subject to approval by Ukraine's Ministry of Finance, which we believe will be most likely granted.

The agency has also downgraded the city's National Long-Term rating to 'BB+(ukr)' from 'BBB(ukr)' with Negative Outlook. Kyiv's domestic senior debt ratings have been downgraded to 'CC'/'BB+(ukr)' from 'CCC'/'BBB(ukr)'.

"Fitch continues to expect Kyiv's finances to remain fragile over the medium term, negatively affecting its financial flexibility. This is due to the overall weakness of sovereign public finances, the reduced predictability of fiscal policy and a very short planning horizon, all exacerbated by the volatile macro-economic environment in Ukraine," Fitch said.

Fitch assesses Kyiv's management as weak. Ukraine's fiscal discipline and long-term financial planning is emerging, while the city's debt management is lacking sophistication and relies on short-term policy options. Additionally, overall oversight over the city's PSEs is weak, leading to reduced control and accumulation of contingent liabilities, which eventually migrate to direct risk for the city.

Fitch said that recovery prospects for Kyiv's economy remain weak, with minor growth of 1%-2% projected by Fitch for the country's GDP in 2016-2017 (2015: contraction 9.9%). Combined with low wealth metrics by international standards (GPD per capita was $2,123 in 2015), this leads us to assess the national economy as weak, constraining the city's ratings.

At the same time, Kyiv remains one of the country's wealthiest cities, about 2x outperforming average per capita GRP of the country's regions. The city benefits from its capital status and concentrated nature of Ukraine's economy. Historically the city accounts for more than 20% of the country's GDP.

Fitch would expect to downgrade the city's ratings further to 'RD' (Restricted Default) if the city fails repay the domestic bond at maturity in December 2016.

Fitch will review the city's ratings once the debt exchanges are completed and sufficient information is available on Kyiv's credit profile. However, the rating will likely remain low, given high country risks and Ukraine's 'CCC' Country Ceiling.

"If the city repays its domestic bond in full at maturity in December without extension, which is unlikely, we could upgrade the rating," the agency said.

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