Ukraine’s Rating Cut by Fitch as Restructuring Risk Rises

Ukraine’s sovereign credit grade was cut by Fitch Ratings, which said a debt restructuring is “increasingly probable” after the country agreed on a $17.5 billion bailout from the International Monetary Fund.

Fitch reduced Ukraine by one step to CC, leaving it as the lowest-grade sovereign that isn’t in default. The country is rated Caa3 by Moody’s Investors Service and CCC- by Standard & Poor’s.

The IMF bailout will “help to close Ukraine’s financing gap, but an associated restructuring of privately-held external debt appears increasingly probable,” Fitch analyst Charles Seville said Friday in a statement from New York. “Sovereign creditworthiness has deteriorated.”

Ukraine’s economy has been hurt by a pro-Russian insurgency in the nation’s eastern industrial base that’s drained foreign reserves and helped turn the hryvnia into the past year’s worst-performing currency. The IMF rescue, sealed Thursday and rising to $40 billion with outside aid, allows the government to begin talks with creditors. The IMF-led package assumes existing bondholders will contribute $13.5 billion.

The downgrade was “inevitable, and largely as expected given looming negotiations over debt restructuring,” Timothy Ash, the chief emerging-markets economist at Standard Bank Group Ltd. in London, said in an e-mailed note. “This is a country which faces huge challenges in terms of macro stability, political stability, security and debt sustainability, and this is being reflected in the ratings.”

Merkel, Hollande

The IMF announced its financial assistance on the same day as a cease-fire was brokered in the Belarusian capital of Minsk with help from German Chancellor Angela Merkel and French President Francois Hollande. The cease-fire is scheduled to start Feb. 15.

Fitch estimates that the economy will contract 5 percent this year.

Ukrainian benchmark dollar debt due 2017 fell 2.7 cents to 54.13 cents on the dollar Friday, sending the yield up to 40.6 percent, from 37.9 percent, data compiled by Bloomberg show. The hryvnia gained 2.3 percent versus the dollar, paring the decline over the past year to 66 percent, data compiled by Bloomberg show.

Investors often disregard ratings companies’ credit grade and outlook changes. France’s 10-year yield, which was 3.08 percent when S&P removed its top rating in January 2012, tumbled to a record-low 1.339 percent on Aug. 15 last year.

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