OREANDA-NEWS. September 21, 2015. Fitch Ratings has downgraded the City of Kyiv's Long-term local currency Issuer Default Rating (IDR) to 'C' from 'CC' and its National Long-term rating to 'CCC(ukr)' from 'BB(ukr)'. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS
The downgrade reflects the following rating drivers and their relative weights:

HIGH
The downgrade of Kyiv's Long-term local currency IDR reflects Fitch's view that default by the city on certain senior debt obligations is now almost inevitable. This follows recent announcements by the city to extend the maturities of these bonds (series F, G and H). In its decisions dated 3 September 2015 and 30 July 2015, Kyiv's city council voted to postpone repayment of UAH5.165bn senior unsecured domestic bonds by 360 days.

Fitch treats announced restructurings as defaults in accordance with its distressed debt exchange (DDE) criteria. However, the proposals do not involve any write-down of principal, and coupons payable on the bonds will not decrease.

Following the downgrade of the city's Long-term local currency IDR and National Long-term rating, Fitch has downgraded the following senior debt issues subject to restructuring to 'C' and 'CCC(ukr)':

- Series '4-H' UAH2,375m bond due in October 2015
- Series '2-F' UAH875m bond due in December 2015
- Series '3-G' UAH1,915m bond due in December 2015

Fitch also notes that Kyiv will face refinancing of its outstanding USD250m eurobonds in November 2015 and USD300m in July 2016. According to the city's announcements, Kyiv launched consent solicitations to extend the maturities of these eurobonds. Kyiv has initiated the restructuring process on these external debt obligations as a result of sovereign intervention.

The Cabinet of Ministers of Ukraine required the city of Kyiv, alongside other state-owned entities, to extend the maturity of its external debt as part of a broader exercise to support Ukraine's public sector finances and external liquidity following the introduction of the IMF's Extended Fund Facility for Ukraine in March 2015.

The city of Kyiv's Long-term foreign-currency IDR is rated 'C', following the recent sovereign downgrade, which triggered the downgrade of the city (see 'Fitch Downgrades Cities of Kyiv and Kharkov to 'C'' dated 2 September 2015 at www.fitchratings.com).

MEDIUM
The city's economy is likely to be negatively affected, as Ukraine's real GDP fell 6.8% in 2014, and Fitch assumes further contraction by 9% yoy in 2015 given the negative macroeconomic trend. The impact will be partially mitigated by the city's well-diversified economy. Historically Kyiv contributed about 18% to Ukraine's GDP in 2009-2013.

RATING SENSITIVITIES
Fitch would expect to downgrade the city's Long-term foreign and local currency IDRs further to 'RD' (Restricted Default) at the point of execution of the exchange offers on outstanding senior bonds, should they go ahead and if this restructuring meets Fitch's DDE criteria or if the city misses the payment according ?? original schedule.

Fitch will review the city's ratings once the debt exchanges are completed and sufficient information is available on Kyiv's credit profile. However, the rating will likely remain low, given high country risks and Ukraine's 'CCC' Country Ceiling.

The rating actions are as follows:

- Long-term foreign currency IDR: affirmed at 'C'
- Long-term local currency IDR: downgraded to 'C' from 'CC'
- Short-term foreign currency IDR: affirmed at 'C'
- National Long-term rating: downgraded to 'CCC(ukr)' from 'BB(ukr)'
- Senior unsecured domestic bonds: downgraded to 'C' from 'CC'
- Senior unsecured domestic bonds: downgraded to 'CCC(ukr)' from 'BB(ukr)'
- Senior unsecured eurobonds: affirmed at 'C'