Moody's Investors Service has downgraded the foreign- and local-currency ratings of the Ukrainian cities of Kyiv and Kharkiv to Ca from Caa3, reads a report on the rating agency's website.
"The outlook on the ratings is negative," according to the document.
"The main driver of the downgrades is the likelihood of private creditors incurring substantial losses from debt restructuring and the increase in systemic risk stemming from deterioration of the Ukrainian government's credit profile, as reflected by Moody's recent downgrade of the sovereign's government bond rating to Ca (negative outlook) from Caa3 (negative outlook)," the agency stated.
Ratings rationale
Kyiv
The key driver of Moody's decision to downgrade Kyiv's long-term ratings to Ca is the city's participation in the Ukrainian government's plan to restructure its outstanding eurobonds and the rating agency's expectation that private creditors will incur substantial losses on Kyiv's debt as a result of the restructuring. In Moody's view, the Ca ratings incorporate the expected losses for the creditors, while the negative outlook reflects the uncertainties over the parameters of restructuring, the final terms of which may lead to losses greater than currently expected by Moody's. The impact to the creditors after restructuring will be determined by the terms of the debt exchange which are currently being discussed with the creditors.
The City Council recently filed with Ukraine's Ministry of Finance its intention to restructure its foreign currency bonds ($250 million and $300 million) due in 2015 and 2016. These bonds will be included in the restructuring package together with the sovereign government eurobonds. In addition, there are plans to restructure the local currency public debt, although no decision has yet been taken.
If the city does not restructure its debt, it will face significant refinancing risks, as repayments of public debt due in 2015 represent over 50% of Kyiv's direct debt, a level equivalent to 48% of 2014 operating revenues.
Moody's notes that the rating also reflects the elevated systemic pressures from a deterioration in Ukraine's credit profile. The city has significant institutional, financial and macroeconomic linkages with the central government.
Kharkiv
The Ca rating primarily reflects the deterioration in Ukraine's credit profile which has direct implications for the ratings of the city of Kharkiv given its institutional, financial and macroeconomic linkages with the central government. The city is neither sufficiently insulated from national market risks nor has sufficient fiscal autonomy to hold a rating exceeding the sovereign level.
Moody's also notes a significant uncertainty surrounding Kharkiv's repayment of the missed payments on a loan received from Ukreximbank, which had been granted to finance the renovation of the city's public transport infrastructure in preparation for the Euro 2012 Football Championship. The Ca rating and the negative outlook adequately capture the ongoing uncertainty around future losses to the creditors.
Recently Moody's was informed that Kharkiv missed the payments of two principal installments, of UAH85 million ($3.6 million) and UAH100 million ($4.2 million) in 2014. According to Moody's calculations, the city did have sufficient liquidity to repay the debt.
Both Kyiv and Kharkiv have significant institutional and financial linkages with the central government. Such linkages are reflected in the fact that the Ukrainian government exerts a wide control over the cities' finances which are exposed to possible reductions in state funding, and withdrawal of liquidity from municipal treasury accounts as has occurred in the past.
The macroeconomic linkages between the central government and Kyiv and Kharkiv are explained by the exposure of both cities' tax revenues to deterioration in domestic economic conditions. Personal income tax, which is exposed to business cycles, accounts for the majority of the cities' tax revenues.
Rationale for the negative outlooks
The negative outlook on the city of Kyiv's ratings reflects the possibility that losses to the creditors after restructuring could be higher than currently anticipated. The city of Kharkiv's negative outlook takes into account the uncertainty surrounding losses to creditors on the missed loan payments.
The negative outlooks also reflect increasing systemic pressures and mirror the negative outlook on the sovereign government bond ratings.
What could change the ratings down/up
Downward pressure could be exerted on Kyiv's and Kharkiv's ratings following losses to creditors from debt restructurings/missed payments which exceed those commensurate with the Ca range and; a further weakening of the sovereign credit profile, as captured by a downgrade of the sovereign rating.
Given the negative outlook on the ratings, upward pressure is unlikely in the short term. At the same time, an upward change in the ratings outlooks and/or upgrades of the ratings of both cities could arise from a strengthening of the sovereign credit profile, resulting in an upward sovereign rating action, provided that the expected losses to creditors of the cities from the debt restructuring/missed payments are commensurate with a higher rating.
No comments:
Post a Comment