OREANDA-NEWS. Fitch Ratings has downgraded JSC The State Export-Import Bank of Ukraine (Ukreximbank) and JSC State Savings Bank of Ukraine (Oschadbank) Long-term foreign currency Issuer Default Ratings (IDRs), and their foreign currency senior debt ratings, to 'CC' from 'CCC'. Fitch has affirmed the banks' Long-term local currency IDRs at 'CCC'. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS
The downgrade reflects Fitch's view that defaults by both banks on their external debt obligations now appear probable. This follows the announcement by Ukraine's Ministry of Finance (Ministry) on 13 March 2015 on the sovereign's external debt restructuring, in which the Ministry indicated that the external debt of Ukreximbank and Oschadbank, alongside that of certain other quasi-sovereign entities, "will be included in the debt operations". At the same time, the Ministry stated that "each entity will undergo a separate process targeting its specific situation".

Ukreximbank has two large outstanding eurobonds: USD750m due on 27 April 2015 and USD600m on 22 January 2018. Oschadbank has USD700m eurobonds due on 10 March 2016 and USD500m due on 20 March 2018. The banks have yet to make any public announcements about possible debt restructurings, if any, and their potential terms and conditions. Oschadbank has paid coupons on its two Eurobonds during March 2015, including one this week after the Ministry of Finance's announcement.

Fitch views default as probable given the Ministry's announcement and the government's full ownership of the banks. At the same time, the reference to a "separate process" for each bank and the absence, to date, of any announcements from the banks on any possible restructuring mean that default is not yet quite inevitable.

In accordance with Fitch's distressed debt exchange (DDE) criteria, a DDE is deemed to have occurred if a restructuring imposes a material reduction in terms compared with the original contractual terms of an entity's financial obligations, and the restructuring is conducted to avoid bankruptcy, insolvency or intervention proceedings or a payment default. Execution of a DDE on the banks' external debt would result in them being downgraded to 'RD' (Restricted Default).

The affirmation of the banks' 'CCC' Long-term local currency IDRs reflects the fact that their local currency-denominated liabilities would not be affected by any restructuring process. The banks' access to local currency liquidity, including through the National Bank of Ukraine, in case of need, has been maintained so far, and Fitch estimates that both banks should currently meet minimum regulatory capital requirements reasonably comfortably, even after the asset inflation caused by further hryvnia depreciation year to date. At the same time, the banks' local currency credit profiles are still under considerable pressure due to weak asset quality and performance, the very challenging operating environment and the limited capacity of the sovereign to provide support.

The affirmation of the banks '5' Support Ratings and revision of the banks' Support Rating Floors to 'No Floor' from 'CCC' reflects Fitch's view that foreign currency support for the banks will not be forthcoming.

The 'ccc' VRs of both banks are not affected by this rating action, as Fitch has received limited new information on the banks' standalone profiles since the review in January 2015. In particular, Fitch has not been informed of Ukreximbank's current foreign currency liquidity position, ie the extent to which it might be in a position to meet its upcoming eurobond payment in the absence of a restructuring. As of 26 January 2015, the banks had not accumulated sufficient foreign currency to meet upcoming eurobond maturities.

RATING SENSITIVITIES
The banks' Long-term foreign-currency IDRs would be downgraded to 'C' on the announcement of a debt exchange offer and further to 'RD' upon completion of exchanges in respect of their external debt obligations. The banks' ratings could be maintained at their current levels, or moderately upgraded, if their debt is not restructured together with that of the sovereign.

The rating actions are as follows:

Ukreximbank:
Long-term foreign currency IDR: downgraded to 'CC' from 'CCC'
Long-term local currency IDR: affirmed at 'CCC'
Senior unsecured debt of Biz Finance PLC: downgraded to 'CC' from 'CCC, Recovery Rating 'RR4'
Subordinated debt: affirmed at 'C'/Recovery Rating 'RR5'
Short-term foreign currency IDR: affirmed at 'C'
Support Rating: affirmed at '5'
Support Rating Floor: revised to 'No Floor' from 'CCC'
Viability Rating: 'ccc', unaffected
National Long-term rating: affirmed at 'AA-(ukr)'; Outlook Stable

Oschadbank:
Long-term foreign currency IDR: downgraded to 'CC' from 'CCC'
Long-term local currency IDR: affirmed at 'CCC'
Senior unsecured debt of SSB No.1 PLC: downgraded to 'CC' from 'CCC, Recovery Rating 'RR4'
Short-term foreign currency IDR: affirmed at 'C'
Support Rating: affirmed at '5'
Support Rating Floor: revised to 'No Floor' from 'CCC'
Viability Rating: 'ccc', unaffected
National Long-term rating: affirmed at 'AA-(ukr)'; Outlook Stable

In accordance with Fitch's policies the issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original rating.