Fitch upgrades Ukraine's foreign currency IDR to CCC

By bne IntelliNews November 19, 2015

Fitch has upgraded Ukraine's Long-term foreign currency Issuer Default Rating to CCC from RD (Restricted Default), the ratings agency announced on November 18. 

"The country has emerged from default on commercial external debt, issuing new bonds on 12 November to holders of $15bn in defaulted eurobonds. The restructuring pushes out maturities to 2019-2027 and reduces the debt stock by $3bn (3.4% of GDP)," Fitch said in a statement.

"Public debt sustainability has improved. Reduced refinancing needs and a pipeline of official financing give the public and external finances some breathing room and lower the risk of a sovereign debt crisis over the short- to medium-term," the statement added.

The upgrade consolidates the bottoming out of Ukraine's economic collapse, but the overall fall in Ukraine's GDP will reach 11.6% in 2015, including a 20% fall in consumption, the agency estimates.

"Fitch believes a swift recovery is unlikely," the report concludes, forecasting growth at 1% in 2016, possibly reaching 2-3% in 2017. "Exporters face a permanent loss of Russian demand - its share of Ukraine's exports has shrunk to just 12% in 2015 to date from 24% in 2013, while military conflict in the east has damaged the industrial base and supply chains," the report argues.

It adds that "the share of commodities (grain and steel) in exports means that low commodity prices are a net negative."

Regarding Ukraine's threats to default on a $3bn Eurobond held by Russia and maturing on December 20, 2015, Fitch believes that non-payment of the bond by Ukraine "would not constitute a default under Fitch's Sovereign rating criteria".

The upgrade was to be expected, and is reflective of the conclusion of Ukraine's recently concluded $15bn private sector debt restructuring deal, commented Tim Ash of Nomura International.

Recent days saw a marked rally in Ukrainian Eurobonds as a reflection of optimism over signs of compromise from Russia with the West (evidenced by Moscow's offer on its $3bn Ukrainian bond), including cooperation prospects in Syria, with the assumption being that this will moderate tensions over Ukraine. (However, scepticism is more pronounced in Kyiv, given renewed violence in the Donbas.)

The bond rally was part prompted by the Russian bond offer itself, which normalises the financing situation, and also reduces chances of near term default and extends out Ukraine debt service. More impetus was provided by index reweighting, which has forced underweights into the Ukraine trade and offsets any selling by larger bondholders, the analyst notes.

Future rating trends will depend on the maintenance of peace in East Ukraine, plus the success of the administration of President Petro Poroshenko in rolling the reform agenda forward, thereby ensuring that the IMF's credit programme for Ukraine remains on track. "Perhaps most difficult therein now are efforts to counter graft, improve the business environment and hence spur investment," Ash wrote.

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