OREANDA-NEWS. Fitch Ratings has downgraded JSC State Savings Bank of Ukraine's (Oschadbank) Long-term foreign currency Issuer Default Rating (IDR) to 'RD' (Restricted Default) from 'C' and then upgraded it to 'CCC'. The rating actions 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
IDRS, VR, NATIONAL RATINGS AND SENIOR DEBT
Fitch downgraded Oschadbank's Long-term and short-term foreign currency IDRs to 'RD' from 'C' following the completion of the restructuring of its USD700m and USD500m eurobonds due in March 2016 and March 2018, respectively. The restructuring terms included the extension of these bonds' maturity and increase in coupon rates. 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 (including extension of maturity) 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. The downgrade of Oschadbank's IDR reflects Fitch's view that the bank's debt restructuring terms meet these criteria.

The affirmation of the bank's Viability Rating (VR) at 'ccc', the upgrade of the foreign currency Long-term IDR to 'CCC' and the assignment of 'CCC' ratings to the new senior unsecured debt issues reflect Fitch's assessment of the bank's standalone credit profile following its debt restructuring. In particular, the debt exchange (which affected USD1.2bn of eurobonds, accounting for 20% of end-1H15 liabilities) has contributed to a significant lengthening of the bank's external debt maturity profile, thereby reducing refinancing risks. In Fitch's view, the bank's foreign currency liquidity at end-1H15 (comprising cash and equivalents and short-term interbank placements) was sufficient to meet near-term wholesale funding maturities even prior to the restructuring. However, Fitch also notes that stability of the bank's highly dollarised deposit base is key to maintaining FX liquidity.

The bank's VR and IDRs also consider its (i) reasonable liquidity in local currency, underpinned by holdings of unpledged government securities eligible for refinancing with the National Bank of Ukraine (15% of end-1H15 assets); (ii) stabilisation trends in deposit funding, supported by the growing share of public sector accounts (16% at end-1Q15; end-2014: 10%); (iii) reasonable 95% coverage by specific reserves of non-performing loans (NPLs; loans more than 90 days overdue; end-1H15: 25% of loans); and (iv) the bank's compliance with prudential capital requirements (end-8M15: regulatory capital ratio of 13.9% vs. minimum level of 10%).

The ratings remain constrained by the highly stressed operating environment, and resultant pressure on the bank's credit metrics and performance. Credit risks are also heightened by the large borrower concentrations and the material share of FX lending (43% of net loans), mostly to effectively unhedged borrowers, whose debt servicing capacity has been significantly constrained by the recent large hryvnia (UAH) devaluation. Most of these exposures either became NPLs or have been restructured to contribute to the large stock of restructured/rolled-over exposures (end-1H15: 50% of loans, including a restructured loan, 15% of loans, to NJSC Naftogas of Ukraine; CC). These were only modestly provisioned, creating potential for significant future increases in credit losses. Recovery prospects will depend on the performance of the domestic economy and the stability of the UAH.

The large exposure to the sovereign through government debt holdings (domestic debt, mostly UAH-denominated, and so not part of the expected sovereign debt restructuring) and public sector more generally (together at 5.5x Fitch Core Capital at end-1Q15) results in a significant correlation between the credit profiles of Oschadbank and the sovereign.

Additional loss absorption capacity is limited. At end-8M15, the bank could have increased its impairment reserves by only 5% without breaching regulatory capital requirements. Pre-impairment profit was negative in 2014-1Q15, meaning that Oschadbank is likely to need further capital support if performance does not improve and recognition of asset quality problems continues. The latter is also likely as a result of the regulatory asset quality review and capital stress test, which is expected to be finalised in the coming weeks.

SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's Support Rating (SR) of '5' and Support Rating Floor (SRF) 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 'C' 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.

RATING SENSITIVITIES
IDRS, VR, NATIONAL RATINGS AND SENIOR DEBT
The bank's VR, IDRs and senior debt ratings would not 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 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 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.

The rating actions are as follows:
Long-term foreign currency IDR: downgraded to 'RD' from 'C'; then upgraded to 'CCC'
Long-term local currency IDR: affirmed at 'CCC'
Cancelled senior unsecured debt of SSB No.1 PLC [XS0594294695, XS0906434872]: affirmed and withdrawn at 'C', Recovery Rating 'RR4'
Newly issued senior unsecured debt of SSB No.1 PLC [XS1273033719, XS1273034444, XS1273034360]: assigned at 'CCC', Recovery Rating 'RR4'
Short-term foreign currency IDR: downgraded to 'RD' from 'C'; then upgraded to 'C'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Viability Rating: affirmed at 'ccc'
National Long-term rating: affirmed at 'AA-(ukr)'; Outlook Stable.