OREANDA-NEWS. Fitch Ratings has downgraded the City of Kyiv's Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'CC' from 'CCC' and its National Long-term rating to 'BB(ukr)' from 'BBB(ukr)'. The agency has affirmed the city's Short-term foreign currency IDR at 'C'. The Outlook on the National Long-term rating is Negative. The ratings on Kyiv's outstanding senior unsecured USD550m eurobonds and UAH5.4bn domestic bonds have been downgraded to 'CC' from 'CCC' and to 'BB(ukr)' from 'BBB(ukr)'.

Under EU credit rating agency (CRA) regulation, the publication of International Public Finance reviews is subject to restrictions and must take place according to a published schedule, except where it is necessary for CRAs to deviate from this in order to comply with their legal obligations. Fitch interprets this provision as allowing us to publish a rating review in situations where there is a material change in the creditworthiness of the issuer that Fitch believe makes it inappropriate for us to wait until the next scheduled review date to update the rating or Outlook/Watch status. The next scheduled review date for Fitch's ratings on the City of Kyiv was 10 October 2014. However, following the city's announcement to restructure domestic bonds and actual non-repayment of the scheduled tranche on 6 October 2014 Fitch have downgraded the city to reflect adverse deterioration in its credit profile.

KEY RATING DRIVERS
The downgrade reflects the following rating drivers and their relative weights:
High
The downgrade follows the city's missed payment on 6 October 2014 of a scheduled repayment of UAH1.125bn (UA4000142707). The city council has announced the restructuring of domestic bonds and actual non-repayment of the scheduled tranche. Therefore Fitch views these bonds as distressed debt, demonstrating a very high level of credit risk with increased probability of default according to Fitch's criteria.

In its decision dated 18 September 2014, Kyiv's city council voted to postpone repayment of UAH2.625bn (about USD200m) senior unsecured domestic bonds by 360 days.

Fitch considers Kyiv's recent inability to honour immediate refinancing needs as materialisation of significantly increased refinancing risk. The weakness of the domestic capital market puts additional pressure on the city's already distressed ability to service its debt. The city will also be refinancing its two outstanding USD250m eurobonds and UAH1.9bn domestic bonds coming due in 2H15.

The city's unhedged forex risk is exacerbated as Ukranian hryvnia has depreciated 39% against the dollar since end-2013.

The city's liquidity position is weak despite increased cash holdings up UAH570m at end-August 2014 (2013: UAH333m).

Medium:
The city's economy is likely to be negatively affected, as Fitch expects Ukraine's real GDP to shrink by at least 6.5% in 2014, and assumes zero growth in 2015 and 2016 given political uncertainty. The negative recession impact will be partially mitigated by the city's well-diversified economy, while historically Kyiv contributed about 18% to Ukraine's GDP in 2009-2013.

The city's ratings also reflect the following rating drivers:
Fitch expects volatility in Kyiv's budgetary performance due to the lower predictability of potential fiscal changes as national parliamentary elections are scheduled on 26 October 2014.

Ukraine's ability to support Kyiv is going to be tested as the national government's financial flexibility has significantly reduced in 2013-2014. Fitch used to view Kyiv's status as Ukraine's capital and the administration's integration with the central government as a supporting factor for the city's ratings. However Ukraine's weakened institutional framework, despite the city's political and economic importance to the state might obstruct timely support to the city and further exacerbate downside risks by end-2014 and in 2015.

If Kyiv does not cure the overdue payment at the end of the grace period on 9 October 2014 Fitch will consider the extension of the bond repayment as a distressed debt exchange (DDE). A DDE will be viewed a 'Restricted Default' as outlined in Fitch's global criteria report 'Distressed Debt Exchange' and the agency will downgrade Kyiv's National Long-term rating and local currency Long-term IDR to 'RD' (Restricted Default) and the bond ratings of the affected security (UA4000142707) to 'D' (Default).