TEXT-S&P affirms Ukrainian City of Kyiv ‘B-‘ rating; outlook stable
Liquidity
We regard Kyiv’s liquidity position as “very negative”. The city’s free cash
position will remain volatile and its access to external liquidity
“uncertain”. Given its high debt service, this will continuously expose Kyiv
to material refinancing risks in the medium term (see “BICRA On Ukraine
Revised To Group ‘9’ From Group ’10’,” published Nov. 9, 2011, on
RatingsDirect on the Global Credit Portal). Debt service is likely to stay at
a material 10% on average in 2013-2014, despite a reduction after a peak of
above 20% of operating revenues in 2012. This will be due to Kyiv’s high debt
burden and persistently high interest payments, the latter of which results
from existing tight capital market conditions.
The city’s material debt repayment needs in the next 12 months consist of
foreign currency-denominated loan-participation notes (LPNs) and bank loans.
Our base-case scenario assumes Kyiv will refinance the LPN with a new bond
(with the first tranche having already been placed in July 2012) and extend
existing bank loans.
Since all LRG borrowing is subject to Ministry of Finance approval, the timely
and adequate institutional and legal support of the sovereign remains a key
assumption of our base-case scenario. Moreover, given that bank loans were
imposed on the city by the sovereign in 2009-2010 to cover energy payables, we
expect the central government will play a crucial role in repaying and
refinancing these obligations. This assumption is evidenced by the loan from
OJSC Alfa-Bank (BB/Positive/B; Russia national scale ‘ruAA’)/ Alfa-Bank
Ukraine (B-/Stable/C; Ukraine national scale ‘uaBBB-‘), the larger part of
which was repaid using central government pass-through funds in July 2012.
Recovery analysis
The ‘4’ recovery rating on Kyiv’s LPNs indicates our expectation of average
(30%-50%) recovery in an event of payment default. For more information see
“Recovery Ratings Assigned To Debt Of 22 LRGs; Issue Ratings On Those 22 LRGs
Affirmed,” published on May 24, 2010, on RatingsDirect.
Outlook
The stable outlook reflects our expectation that, despite turbulent capital
market conditions and a very weak cash position, Kyiv will pass the peak of
its debt in 2012 given its positive refinancing track record. The outlook also
factors in a continued recovery of Kyiv’s operating financial performance
through 2013, supported by a recovering economy and continued operating
support from the sovereign, which should allow the city to avoid further debt
accumulation.
Positive rating actions would hinge on stronger budgetary performance, with
operating surpluses approaching 7%-8% in 2012-2013 or improved terms of
borrowings or refinancing that would result in stronger self-financing
capacity and a lower debt burden. The continuing reduction of the payables of
Kyiv’s related entities, which would lead to lower contingent risk, would also
support ratings upside.
We could take a negative rating action if credit market turbulence impeded the
city’s plans to refinance, especially in the absence of alternative debt
repayment scenarios. Beyond the 2012 refinancing plan, ratings downside might
be triggered by the city’s operating performance dipping into the red, which
would put Kyiv’s capacity for interest payments under pressure, especially if
state support were weaker. These factors would most likely also change our
assessment of the city’s quality of financial management.
Related Criteria And Research
Related criteria
— Methodology For Rating International Local And Regional Governments,
Sept. 20, 2010
— Assigning Recovery Ratings To International Local And Regional
Governments’ Speculative-Grade Debt, Feb. 3, 2009
Related research
— BICRA On Ukraine Revised To Group ‘9’ From Group ’10’, Nov. 9, 2011
Ratings List
Ratings Affirmed
Kyiv (City of)
Issuer Credit Rating B-/Stable/–
Senior Unsecured B-
Recovery Rating 4
Kyiv Finance PLC
Senior Unsecured B-
Recovery Rating 4