OREANDA-NEWS. Fitch Ratings has upgraded JSC The State Export-Import Bank of Ukraine's (Ukreximbank) Long-term foreign currency Issuer Default Rating (IDR) to 'CCC' from 'RD' and senior unsecured debt rating to 'CCC' from 'C'. The upgrades follow the completion of the bank's external debt restructuring. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS
VR, IDRS, NATIONAL RATINGS AND SENIOR DEBT
Fitch has downgraded the bank's Viability Rating (VR) to 'f' from 'ccc' and immediately upgraded the VR back to 'ccc'. The downgrade to 'f' reflects the agency's view that the bank failed when defaulting on (restructuring) its external debt. This view is based on Fitch's understanding that the bank probably had insufficient foreign currency liquidity to continue to service its external debt - in particular to repay its USD750m eurobond due on 27 April 2015 - and so would likely have defaulted because of weaknesses in its standalone credit profile, even if a debt restructuring had not been imposed by the Ukrainian authorities. The bank has not made full information available to Fitch with respect to its foreign currency liquidity position at the time of its default. However, on the basis of available data the agency believes it is appropriate to denote the bank as having failed.

The upgrade of the VR to 'ccc', and Long-term foreign currency IDR and senior debt rating to 'CCC' reflects Fitch's assessment of the bank's standalone profile following its external debt restructuring. Specifically, the upgrade reflects reduced refinancing risks, as the restructuring of the bank's eurobonds (with a combined nominal value of USD1,475m, or 23% of end-1H15 liabilities under local GAAP) resulted in a significant lengthening of the external debt maturity profile. At end-1H15, the bank's foreign currency liquidity (comprising cash and equivalents and short-term interbank placements) was comfortably sufficient to meet near-term wholesale funding maturities, although stability of the bank's highly dollarised deposit funding is also key to maintaining FX liquidity.

The bank's VR and IDRs are also supported by (i) its reasonable liquidity in local currency, underpinned by large holdings of unpledged government securities eligible for refinancing with the NBU (32% of end-1Q15 assets); (ii) generally sticky customer funding, in part due to the presence of public sector corporates (24% of liabilities) in the deposit base; (iii) reasonable 93% reserve coverage of non-performing loans (NPLs; loans more than 90 days overdue; end-1H15: 35% of loans); and (iv) the bank's compliance with the prudential capital requirements (end-1H15: regulatory capital ratio of 12.1% vs. minimum level of 10%).

However, the ratings remain constrained by the highly stressed operating environment, and resultant pressure on asset quality, performance and capital. Downside risks to asset quality remain high given large borrower concentrations, the material share of FX-lending (74% of net loans) and sizable restructured/rolled-over exposures (44% of the total), which are only modestly provisioned. Recovery prospects will depend on the performance of the domestic economy and improvements in external markets, as many of these borrowers are exporters. The bank's asset quality remains highly correlated with the sovereign's credit profile due to the bank's large exposure to sovereign debt (end-1Q15: 10x Fitch Core Capital, FCC; this is all domestic debt, both FX and UAH-denominated, and so not part of the expected restructuring) and public sector more generally (4x FCC).

Loss absorption capacity is limited. At end-1H15, the bank could have increased its impairment reserves by 2% only without breaching regulatory capital requirements. The bank's (core) Tier 1 ratio was a weak 6.8% at end-1H15, with overall regulatory solvency relying significantly on subordinated debt. Pre-impairment profit was negative in 2014-1Q15, meaning that Ukreximbank is likely to need further capital support if performance does not improve and asset quality remains under pressure.

SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's Support Rating '5' and Support Rating Floor of 'No Floor' reflect Fitch's view of the Ukrainian authorities' still limited ability to provide support to the bank, in particular in foreign currency, in case of need, as indicated by the sovereign's 'CC' Long-term foreign-currency IDR. However, the propensity to provide support to the bank remains high, in our view, in particular in local currency, given the bank's 100%-state ownership, policy role, high systemic importance, and the track record of capital support for the bank under different governments.

SUBORDINATED DEBT
Ukreximbank's subordinated debt rating has been affirmed at 'C', the lowest possible issue rating. The two-notch differential between the bank's VR of 'ccc' and the subordinated debt rating of 'C' reflects one notch for incremental non-performance risk (resulting from the flexibility to defer coupons in certain circumstances, for example if the bank reports negative net income for a quarter) and one notch for potentially weaker recoveries due to the instrument's subordination.

RATING SENSITIVITIES
VR, IDRS, NATIONAL RATINGS AND SENIOR DEBT
The bank's VR, IDRs and senior debt ratings would not automatically be downgraded in case of a further sovereign downgrade/debt restructuring, as the bank's low ratings already reflect very high levels of credit risk. However, the bank's IDRs and debt ratings could be downgraded in case of transfer and convertibility restrictions being imposed, which would restrict its ability to service its obligations. The VR, IDRs and debt ratings could also be downgraded if the sovereign defaults on its domestic FX debt, as this may result in the acceleration of the bank's external debt, which in Fitch's view it would be unlikely to be able to redeem.

The bank's ratings are also likely to be downgraded if further deterioration in asset quality results in capital erosion, without sufficient support being provided by the authorities, or if deposit outflows sharply erode the bank's liquidity, in particular in foreign currency. Stabilisation of the sovereign's credit profile and the country's economic prospects would reduce downward pressure on the ratings.

SUPPORT RATING AND SUPPORT RATING FLOOR
The SR could be upgraded and the SRF revised upwards if Fitch markedly revises its view of the authorities' ability to provide timely support to the bank, in particular, in foreign currency. However, this is unlikely in the near term, given the country's weak external finances and expected sovereign external debt restructuring.

SUBORDINATED DEBT
The rating could be upgraded in case of an upgrade of the bank's VR.

The rating actions are as follows:

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