OREANDA-NEWS. Fitch Ratings has affirmed the City of Kyiv's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'CC' and its National Long-term rating at 'BB(ukr)'. The agency has also affirmed the city's Short-term foreign currency IDR at 'C'. The Outlook on the National Long-term rating is Negative.

The affirmation follows the timely remedy of the overdue bond repayment (UA4000142707) within its grace period. The repayment became possible following the issuance of a new domestic bond on 8 October 2014. Fitch treats the transaction as timely repayment of the debt obligation, having previously stated that this debt could be subject to distressed debt exchange (DDE) criteria.

The ratings also factor in prevailing material refinancing risk, significant exposure to forex risk, weak macro-economic forecast, low propensity of the state support amidst weakened Ukraine's institutional framework and continued political uncertainty.

Kyiv issued series H senior unsecured domestic bonds of UAH2.625bn (UA4000186878) with 360 calendar days to maturity. Simultaneously the city repaid its UAH1.125bn domestic bond, which matured on 6 October 2014.

The city plans to repay domestic bonds (UA4000142715, UA4000142723 and UA4000142731) maturing in October-November 2014 with proceeds from the new bonds. In Fitch's view, the city's cash holdings of UAH570m at end-August 2014 (2013: UAH333m) should be sufficient to honour coupon payments on bonds maturing until end-2014.

Nonetheless, Fitch considers Kyiv's exposure to refinancing risk as material. The domestic capital markets remain weak, while the peak of the city's repayments will be in 12-15 months. The city will be refinancing its outstanding USD250m eurobonds and domestic bonds coming due in 2H15.

Additionally, the city remains exposed to unhedged forex risk, exacerbated by the Ukranian hryvnia's depreciation by 39% against the dollar since end-2013.

The macro-economic forecast is negatively affecting the city's ratings. 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 well-diversified economy.

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.

Fitch assesses Ukraine's ability to support Kyiv as having low propensity to materialise in 2014-2015, considering the national government's limited financial flexibility. Fitch previously viewed 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.

RATING SENSITIVITIES
Any adverse change leading to partial or full containment of the city's ability and/or willingness to service its debt would lead to a downgrade.

Sustainable restoration of the city's financial flexibility leading to withdrawal of material downside credit risks would lead to an upgrade.