Ukrainian City Of Kyiv Off Watch Negative Because It Managed To Refinance Its …
• The Ukrainian capital city of Kyiv has placed UAH2 billion (about US$245 million) out of its UAH3 billion domestic bond
• In our view, this amount secures enough funds to make a US$250 million payment to LPN holders on Nov. 26, 2012.
• We are therefore removing Kyiv from CreditWatch with negative implications and affirming the long-term rating at ‘B-‘.
• The stable outlook reflects our expectation that, despite turbulent capital market conditions and a very weak cash position, Kyiv will be able to arrange the refinancing for maturing debts when necessary, as confirmed by its positive refinancing track record.
Standard Poor’s Ratings Services said today that it had affirmed its ‘B-‘ long-term issuer credit rating on the Ukrainian capital city of Kyiv and removed it from CreditWatch, where it had been placed with negative implications on Oct. 29, 2012. The outlook is stable.
The CreditWatch placement reflected our concerns about Kyiv’s slow progress in refinancing a $250 million U.S. dollar-denominated loan participation note (LPN) due on Nov. 26, 2012.
On Nov. 23, 2012, Kyiv finally placed Ukrainian hryvnia (UAH) 2 billion out of the UAH3 billion (US$245 million) domestic bond with state banks largely providing the funds. In our view the amount raised is sufficient to secure payments to LPN holders on Nov 26, 2012.
The rating on Kyiv continues to reflect Ukraine’s “volatile and underfunded” institutional framework, which constrains the city’s financial flexibility. It also reflects Kyiv’s high debt service, “very negative” liquidity, and material debt burden, with associated foreign-exchange risks. However, Kyiv’s importance as the administrative and economic center of Ukraine (B+/Negative/B; Ukraine national scale ‘uaA+’) and the city’s fairly diversified economy, with wealth exceeding the national average severalfold, support the rating.
The stable outlook reflects our expectation that, despite turbulent capital market conditions and a very weak cash position, Kyiv will be able to arrange the refinancing for maturing debts when necessary, as confirmed by its positive refinancing track record. The outlook also factors in our expectations of 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 borrowing or refinancing that resulted 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 the city’s operating performance dipped into the red, which would put Kyiv’s capacity for interest payments under pressure, especially if state support weakened. These factors would most likely also change our assessment of the city’s quality of financial management.