Ukraine Credit Rating Cut to Second-Lowest Level by Moody’s

Ukraine had its credit rating cut by Moody’s Investors Service to the second-lowest level as the country started debt-restructuring negotiations with bondholders.

Moody’s lowered the rating by one level to Ca and said in statement that the likelihood of a default is almost certain. The credit outlook is negative.

Private creditors are likely to suffer “substantial losses” as a result of the government’s restructuring plan, Moody’s analysts including Kristin Lindow wrote. Ukraine’s indebtedness will “remain very high, in spite of the debt restructuring and plans to introduce reforms,” they said.

Verbal sparring between Ukraine and its creditors, including Franklin Templeton and Russia, is in full swing as Finance Minister Natalie Jaresko urged bondholders to accept a restructuring agreement now or risk facing bigger losses. Both Russia and Templeton have indicated in recent days that they won’t accept any cuts to the principal value of the $10 billion of bonds they hold.

Ukraine is looking to shave about $15 billion from its debt-servicing costs over four years as part of the $40-billion aid International Monetary Fund approved this month. Jaresko asked for more foreign aid this week to help the economy recover from the annexation of its Crimea region by Russia a year ago and a separatist insurgency in its eastern industrial base.

‘Distressed Exchange’

Investors are skeptical that creditors will get anything less than a steep writedown. The $2.6 billion bond due in July 2017 slid to a record on Tuesday, falling 0.95 cent to 38.88 to the dollar, according to data compiled by Bloomberg.

The notes tumbled below 40 cents last week, levels Bank of America Corp. said were consistent with about a 20 percent reduction in the principal and a 50 percent cut to coupon payments.

“The likelihood of a distressed exchange, and hence a default on government debt taking place, is virtually 100 percent,” Moody’s analysts said.

Ukraine’s room to maneuver is limited after the insurgency drove international reserves to a record $5.62 billion in February. The economy shrank as much as 10 percent in the first quarter, Jaresko said in an interview with Bloomberg Tuesday.

“There is a serious question mark about debt restructuring,” Nicholas Spiro, managing director at Spiro Sovereign Strategy, said by phone. “It’s a multi-faceted crisis, and it’s very difficult to see how any kind of financial and economic stabilization can occur given the conflict between Russia and Ukraine.”

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