Fitch Upgrades Ukraine's City of Kyiv to 'CCC'

Fitch Ratings has upgraded the City of Kyiv's Long-Term Foreign Currency Issuer Default Rating (IDR) to 'CCC' from 'D'. A full list of rating actions is at the end of this rating action commentary.

Under EU credit rating agency (CRA) regulation, the publication of Sovereign reviews (including Local and Regional Governments) is subject to restrictions and must take place according to a published schedule, except where it is necessary for CRAs to deviate from this in order to comply with their legal obligations. 

Fitch interprets this provision as allowing us to publish a rating review in situations where there is a material change in the creditworthiness of the issuer that we believe makes it inappropriate for us to wait until the next scheduled review date to update the rating or Outlook/Watch status. 

The next scheduled review date for the City of Kyiv was 18 March 2016. However, in this case the deviation was caused by the completion of exchange execution on distressed Eurobonds of the city.

KEY RATING DRIVERS 
The following are the key drivers for today's rating action and their relative weights:

HIGH

The upgrade of Kyiv's Long-Term Foreign currency IDR follows the completion of Kyiv's distressed debt exchange (DDE) on 22 December 2015 (see 'Fitch Downgrades Ukrainian City of Kyiv's Foreign-Currency IDR to 'D'' dated 11 November 2015 at www.fitchratings.com). 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 USD550m 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 USD250m Eurobond final maturity was 6 November 2015 and its USD300m Eurobond 11 July 2016.

As the new Eurobonds will be issued by 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 1 October and 7 December 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% yoy 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.

Original