OREANDA-NEWS. April 28, 2015. Fitch Ratings has affirmed the Ukrainian City of Kharkov's Long-term foreign currency Issuer Default Rating (IDR) at 'CC', Long-term local currency IDR at 'CCC' and its Short-term foreign currency IDR at 'C'. Fitch has also affirmed the city's National Long-term rating at 'A+(ukr)' with a Negative Outlook.

KEY RATING DRIVERS

The city's ratings are constrained by the ratings of Ukraine (CC/C). The affirmation reflects Kharkov's exposure to adverse national macro-economic environment and the weakened institutional framework in Ukraine. The ratings also factor in the city's satisfactory budgetary performance and low debt.

Fitch expects that the city's operating performance will be under pressure in the medium term influenced by the shrinking national economy. Operating expenditure is fuelled by accelerating inflation (Fitch forecasts 26% in 2015) and easing tariff regulation of utility services. Fitch estimates that Ukraine's GDP contracted 7.5% yoy in 2014 and expects a further 5% decline in 2015. In Fitch's view, Ukraine's ability to support Kharkov is low given its weak public finance.

Kharkov's direct debt declined to 6% of current revenue at end-2014 from 8.4% in 2013, due to the repayment of a domestic bond in December 2014. At April 2015, the city's outstanding debt was UAH294m due 30 April 2015. Kharkov intends to repay only about 40% of the maturing debt (UAH109.2m) by this date.

Fitch expects that the remainder will be rolled over following the city's negotiation with its creditor, the state Ukreximbank (C/C). The agency views this loan as quasi-market debt due to the state ownership of the lender, and because the loan was contracted by the city under the preparation for the Euro 2012 football championship in Ukraine.

Fitch expects that Kharkov will not take on new borrowing in the medium term given its still satisfactory budgetary performance and adequate liquidity. Kharkov has accumulated high cash reserves, of UAH459m at end-2014, which cover the city's outstanding debt by 1.6x.

In 2014, Kharkov recorded a sound operating balance at 9.8% of operating revenue (2013: 15.3%) and moderate deficit of 4.4% after two years of surplus. Nevertheless the city's budgetary performance is exposed to substantial uncertainty over the development of the national economy and potential changes in the state fiscal policy under the structural reforms undertaken by the new government.

The amount of the city's contingent liabilities (UAH416m at end-2014) exceeds its direct debt and may put pressure on the budget, particularly as major public sector entities are loss-making and depend on subsidies to sustain operations. Fitch expects the contingent liabilities should not jeopardise the city's budget as they currently account for less than 10% of the city's current revenue.

RATING SENSITIVITIES

A downgrade of Ukraine's IDRs would lead to a corresponding action on the city's IDRs. In the absence of a sovereign downgrade, significant deterioration of the city's credit profile could also lead to negative rating action.

A sovereign upgrade could be reflected by Kharkov's ratings provided that the city maintains a stable budgetary performance.