Ukraine Rating Headed for Default Before Boost, S&P Says on Deal

Ukraine’s debt-restructuring agreement with creditors will probably result in a downgrade of the nation’s sovereign-credit rating to default status before leading to an improvement later, Standard & Poor’s said.

S&P kept Ukraine’s foreign-currency debt at CC, its second-lowest grade, with a negative outlook. When the restructuring begins, the company will re-rate the country SD, then probably raise it when the transaction is complete, it said in a statement Friday. The country is rated Ca by Moody’s Investors Service and C by Fitch Ratings.

“Default on Ukraine’s foreign currency debt is a virtual certainty, given the government’s stated position and the difficult macroeconomic environment,” S&P analysts Frank Gill in Madrid and Dubai-based Trevor Cullinan said in the statement. “Once the exchange offer or restructuring is completed, we would likely raise our rating on Ukraine to reflect our forward-looking appraisal of its creditworthiness.”

Ukraine agreed to a restructuring deal with a Franklin Templeton-led creditor committee after five months of talks as the country seeks to avert default and revive an economy battered by a war with rebels backed by Russia in its industrial heartland.

Ukraine’s $2.6 billion 2017 bonds rose 2 cents to 73.26 at 8:10 p.m. on Friday in Kiev after rising 15 cents on the dollar Thursday. The $500 million dollar-denominated bonds due next month also rose 2 cents to 72.08 after surging 12 cents the day before. The hryvnia, which has plunged 25 percent against the dollar since the start of the year, rose 0.4 percent after strengthening 2.4 percent on Thursday.

Debt Deal

The accord includes a 20 percent writedown to the face value of about $18 billion of Eurobonds, the first of which matures in less than a month. Ukraine will also temporarily suspend principal payments due in September and October, Finance Minister Natalie Jaresko said Wednesday. The existing bonds will be rolled into new securities.

S&P said it expects the debt-exchange agreement to be completed by the end of September. It considers both the exchange of bonds and the moratorium a default, it said in Friday’s statement.

Fitch lowered Ukraine’s foreign-currency debt grade to C from CC Thursday, saying it views the creditor deal as a distressed-debt exchange.

Beyond the bondholder approval process, which may last until October, Ukraine still faces severe financing challenges, including a $3 billion bond owned by Russia due in December. The government in Moscow has said it won’t participate in the restructuring.

Economic Outlook

Some analysts also warned that the restructuring could prove inadequate, given the extent of the country’s economic challenges.

S&P assumes that the Russian bond won’t be part of the arrangement, leaving Ukraine government debt at 71 percent of gross domestic product at the end of this year. The company sees the economy contracting 15 percent this year, after shrinking 7 percent in 2014.

“This continues to be a very high debt burden, given the steep contraction of GDP,” S&P said in the statement. “Future projections of general government debt to GDP will remain highly contingent on Ukraine’s exchange rate, its terms of trade, as well as developments on the ground in the eastern part of the country.”

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