Fitch Ratings, an international rating agency, has downgraded Ukraine’s Bankruptcy Long-term Issuer Default Rating in foreign currency from ‘CCC’ to ‘C’.
The agency also removed all classifications of Ukraine from the list of countries under UCO supervision, which the agency’s report described as “close to bankruptcy”, stating:
“A bankruptcy-like process has begun, as the government of Ukraine officially announced on July 20 its agreement to defer external debt repayments for 24 months. The agency sees this move as initiating a bad debt swap process, which is in line with a ‘C’ long-term bankruptcy rating.” IDR in foreign currency and affected securities”.
Fitch believes that investors will likely accept the request for approval, in which case the rating will be downgraded to ‘RD’ (Restricted Bankruptcy) and the affected instruments to ‘D’ after the transaction is scheduled to close on 11 August.
The report notes that serious pressure is on to restructure the debt, and even if the offer is not accepted, the risks of default on payments or initiating an alternative NPL process are high as the Ukrainian government seeks to maintain liquidity amid pressure from acute military spending. .
“Overall, we expect a broader restructuring of government trade debt will be required, although the timing remains uncertain,” the report said.
The local currency IDR has been downgraded to ‘CCC-‘ from ‘CCC’ as the lower risk of bankruptcy compared to foreign currency debt partly reflects the government’s somewhat greater ability to service local currency debt and higher barriers to restructuring. He pointed out that 40% of the debt in the national currency “UAH” is owed by banks (and 52% of the country’s banking sector belongs to the state), and the remaining 47% by private banks.
The agency also says that the share of Ukrainian government bonds held by non-residents has fallen to just 6%, so it does not expect strong international pressure on Ukraine to involve domestic debt in a broader restructuring process.
Fitch also forecasts a 33% contraction in the Ukrainian economy in 2022, with a slight recovery of 4% in 2023.
The report notes that the ability to meet Ukraine’s huge financing needs until 2023 depends largely on bilateral and multilateral support, which is currently uncertain, and that debt restructuring is a possible condition for continued external support on this scale.
Moody’s said on July 22 that Ukraine’s proposed deferral of bond payments would not fully mitigate debt sustainability risks, but took no action on the rating.
It was also reported that on July 20, Ukraine offered Eurobond holders to postpone all payments and repayments, starting from August 1, for two years, while maintaining current rates of return. After this period, interest can be paid immediately or capitalized. It is also proposed to change the terms of Ukraine’s GDP guarantees.
The results of Ukraine’s application for approval of holders of Eurobonds and GDP-notes should be announced on 10 August.
To receive guarantees for GDP, holders must decide on their position before the evening of August 5, and for Eurobonds – before the evening of August 9.
Source: Interfax