Ukraine FC rating lowered to 'CCC' on debt restructuring plan, outlook negative - S&P
S&P Global Ratings lowered the long-term foreign currency rating on Ukraine to 'CCC' from 'CCC+', the outlook on the foreign-currency rating is negative and that on the local-currency rating is stable, the agency said on its website.
"The rating action follows Ukraine's official announcement that it will restructure its foreign currency external debt to restore public debt sustainability, as part of the recently agreed, four-year, $15.6 billon Extended Fund Facility arrangement with the IMF," it said.
"The negative outlook on the FC long-term rating reflects risks to Ukraine's commercial debt service, given the government's debt restructuring plan," the report reads.
"At the same time, we affirmed our 'C' short-term foreign currency, 'CCC+/C' local currency, and 'uaBB' national scale ratings on the sovereign. We understand Ukraine's hryvnia-denominated government debt is not in scope for the debt restructuring plan. The outlook on the local-currency rating is stable," the experts said.
"We could lower the FC ratings in the next 12 months if, for instance, we consider it a virtual certainty that commercial debt obligations will be included in the government's debt restructuring. We understand that the parameters and timing of the restructuring have yet to be decided and are contingent on the IMF's assessment of public debt sustainability, which is expected to be updated in early 2024," according to the document.
"Official creditors, including the U.S., U.K., Canada, France, Germany, and Japan (the Group of creditors of Ukraine [CGU]), have agreed to an extension of the deferral of external debt payments until the end of the IMF program in 2027, from the previously agreed period of August 2022 until September 2024. The CGU also agreed to an additional debt restructuring, which we expect to take place by midyear 2024. This agreement is subject to private external creditors delivering a debt restructuring at least as favorable. However, the potential restructuring will take place more than one year from now and the development of the war in Ukraine remains uncertain. To that end, visibility on the exact scenario for commercial creditors will increase only next year," the report says.
"That said, bilateral debt represents a small 5% of total government debt. Given our understanding that multilateral and domestic government debt (both in LC and FC) are excluded from the debt restructuring plans, there is, in our view, a relatively high probability that a meaningful debt relief exercise will include Ukraine's commercial external debt outstanding. The latter represents about 20% of total government debt, with another 40% constituting domestic-law bonds (both in LC and FC) and 35% from international financial institutions," S&P stated.
"If the commercial debt restructuring takes place in 2024, in light of protracted balance-of-payments and fiscal challenges, we would likely view it as distressed," it said.
"In our view, the government's ability and medium-term incentives to meet its financial commitments in LC are somewhat higher than those in FC. Hryvnia-denominated debt is primarily held by domestic banks, half of which are state-owned," it said.
"Ukraine's medium-term macroeconomic outlook depends heavily on the duration and evolution of the war. Our base-case assumption is that there will not be a near-term end to hostilities," the experts said.