Moody's downgrades Ukraine's sovereign ratings to Ca; outlook remains negative
New York, March 24, 2015 -- Moody's Investors Service has today downgraded Ukraine's long-term issuer and government debt ratings to Ca from Caa3. The outlook remains negative.
The key driver of the downgrade is the likelihood of external private creditors incurring substantial losses as a result of the government's plan to restructure the majority of its outstanding Eurobonds. Also included in the restructuring is the external debt of state-guaranteed entities and selected other state-owned enterprises, and the Eurobonds issued by the capital city of Kiev.
The negative outlook reflects Moody's expectation that Ukraine's government and external debt levels will remain very high, in spite of the debt restructuring and plans to introduce reforms. In a related rating action, Moody's also downgraded the issuer and debt ratings of the "Financing of Infrastructural Projects" (Fininpro) to Ca/(P)Ca from Caa3/(P)Caa3 and maintained the negative outlook. Fininpro's debt is fully and unconditionally guaranteed by the government of Ukraine.
Moody's also lowered Ukraine's country ceiling for long-term foreign currency debt to Caa3 from Caa2, and its country ceiling for long-term domestic currency debt and deposits to Caa2 from Caa1. Ukraine's country ceiling for foreign-currency bank deposits remains unchanged at Ca. All short-term country ceilings also remain unchanged at Not Prime (NP).
RATIONALE FOR THE DOWNGRADE OF UKRAINE'S GOVERNMENT RATINGS TO Ca
The key driver of Moody's decision to downgrade Ukraine's long-term government debt and issuer ratings to Ca is the government's plan to restructure the majority of its outstanding Eurobonds as well as other public sector external debt and the rating agency's expectation that private creditors will incur substantial economic losses as a result of the restructuring. The debt operation is intended to provide $15.3 billion of the four-year, $40 billion external financing package agreed with the IMF and other multilateral and bilateral creditors. The package was approved by the IMF Executive Board on March 11.
Although negotiations over the specific details of the restructuring are only now getting underway, Moody's believes that the likelihood of a distressed exchange, and hence a default on government debt taking place, is virtually 100%. The bonds' recovery value will be determined by the terms of the debt exchange and is currently being discussed with creditors. The terms could include a grace period on principal repayments during the term of the IMF program, a reduction in the existing bonds' current coupons, which now average 7.1%, and a haircut on the outstanding principal.
RATIONALE FOR MAINTAINING A NEGATIVE OUTLOOK
The principal objective of the proposed debt exchange is to reduce the government's external debt and debt service to more manageable levels. This effort will be supported by the economic, budget/debt and monetary reforms being pursued by the new government in connection with the IMF program. These comprehensive sectoral, judicial and social reforms aim to stabilize the economy and return it to a positive growth path.
However, Ukraine's government and external debt will remain at very high levels even if these reforms are successful, and despite the lower debt levels achieved by the external debt restructuring. These solvency challenges are the key reason for maintaining a negative outlook on the government's downgraded ratings.