Ukraine Credit Rating Cut to CC by S&P on Restructuring Plan

Ukraine’s sovereign-credit rating was cut by Standard & Poor’s, which cited the government’s plans to restructure its foreign debt.

S&P on Friday lowered Ukraine’s assessment by one step to CC, three levels above default, its fifth downgrade of the former Soviet republic since November 2013. It assigned a negative outlook. The country is rated Caa3 by Moody’s Investors Service and CC by Fitch Ratings Ltd., two and three levels short of default.

“The negative outlook reflects the deteriorating macroeconomic environment and growing pressure on the financial sector, as well as our view that default on Ukraine’s foreign currency debt is virtually inevitable,” S&P analysts led by Ana Jelenkovic said in a statement from London.

Ukraine’s economy has been battered by a pro-Russian insurgency in its eastern industrial base that’s drained foreign reserves and helped turn the hryvnia into the world’s worst-performing currency. The International Monetary Fund has granted a $17.5 billion loan, while the government has begun talks with creditors in a bid to save about $15 billion over the next four years. It needs a deal by June to receive the next IMF tranche.

The government’s $2.6 billion of bonds due 2017, which hit an all-time low last month, rose 0.6 cents to 43.4 cents on the dollar as of 7:31 p.m. in Kiev. The hryvnia, which has plunged 65 percent to the dollar since the start of 2014, weakened 0.4 percent.

‘Complicate Matters’

The Finance Ministry plans to extend maturities and cut principal and coupon payments on sovereign, sovereign-guaranteed and sub-sovereign foreign debt. Creditors include Franklin Templeton, which holds about $7 billion, and Russia, which has a $3 billion Eurobond that S&P said “is likely to complicate matters.”

“If Ukraine has to pay the $3 billion in debt redemption this year, it will make it very difficult to find the $5 billion in expected debt relief in 2015 that underpins the IMF’s 2015 external-financing assumptions,” the ratings company said.

S&P called Ukraine’s economic situation “challenging,” saying this year’s decline in gross domestic product will be similar to or more than the 7 percent slump registered in 2014. Restoring growth requires a sustainable level of debt and stability on financial and foreign-exchange markets, it said.

“These in turn depend primarily upon exogenous factors that Ukraine does not directly control, including the country’s terms of trade, and the current military conflict in the east of the country, which is undermining trade and confidence,” according to S&P.

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