Ukrainian capital Kyiv upgraded to ’CCC’, says S&P

Standard & Poor’s Ratings Services raised its long-term issuer credit rating on the Ukrainian capital City of Kyiv and its issue ratings on Kyiv’s debt to ’CCC’ from ’CC’, the outlook is stable.

«The City of Kyiv repaid its Ukrainian hryvnia (UAH) 1.125 billion domestic bond series B on Oct. 8, 2014, instead of restructuring it as previously announced. We think Kyiv’s course of action is coordinated with and supported by the central government of Ukraine,» S&P said.

S&P said that although Kyiv will face high debt service obligations in 2015-2016, including repayment of $550 million in eurobonds, we believe that it will similarly benefit from central government support.

«We regard Kyiv’s liquidity position as weak. In our opinion, the city’s cash position will likely remain very low and volatile, while its access to external liquidity will remain uncertain against its continuing exposure to material refinancing risks in 2014 and 2015, with a $250 million eurobond to be repaid in 2015. Nevertheless, while Kyiv’s liquidity position is hampered by its refinancing exposure, we think the central government will support the city’s refinancing efforts,» reads the report.

S&P said that the city made the repayment after arranging refinancing through a newly-issued UAH 2.625 billion domestic bond series H with 360 days maturity. We therefore think the series C, D, and E bonds due 2014 will be repaid on time, the agency said.

«Therefore, our long-term rating on Kyiv is now one notch above our ’ccc-’ assessment of its stand-alone credit profile (SACP) to reflect our expectation of extraordinary government support to the city, which is the only eurobond issuer among Ukrainian local and regional governments (LRGs),» reads the report.

In our 2014-2016 forecast period, we expect only modest tax revenue growth, fuelled mostly by inflation. The city will likely slow its investment program in real terms and post deficits after capital accounts of about 5% of total revenues in 2014-2016, S&P said.

«Under our base case, Kyiv’s tax-supported debt will remain exposed to foreign exchange risks and stay slightly below 60% of operating revenues over our 2014-2015 outlook horizon... In our view, the city’s new borrowing will mostly be to tackle refinancing needs,» reads the report.