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

Under EU credit rating agency (CRA) regulation, the publication of International Public Finance reviews is subject to restrictions and must take place according to a published schedule, except where it is necessary for CRAs to deviate from this in order to comply with their legal obligations.

Fitch interprets this provision as allowing us to publish a rating review in situations where there is a material change in the creditworthiness of the issuer that we believe makes it inappropriate for us to wait until the next scheduled review date to update the rating or Outlook/Watch status. In this case the deviation was caused by the exchange of distressed local currency bonds issued by the city.

KEY RATING DRIVERS
The following are the key drivers for today's rating action and their relative weights:

HIGH

Debt: The downgrade of Kyiv's Long-term local currency IDR follows the extension of maturities of the city's domestic bonds (series G and H), totalling UAH4.29bn, by 12 months each, from the original maturities of 1 October and 7 December 2015, respectively. The city's decision to extend maturities was approved by the national government and the restructuring did not involve a write-down of principal or a decrease in coupons.

Fitch treats restructurings of domestic bonds as defaults in accordance with its distressed debt exchange (DDE) criteria. Therefore we have downgraded the city's Long-term local currency IDR and National Long-term rating to 'RD' and 'RD(ukr)'.

The affirmation of the city's Long-term foreign currency IDR at 'C' (default is imminent or inevitable), reflects expected restructuring of its outstanding USD250m and USD300m eurobonds due in November 2015 and in July 2016, respectively. According to Ukraine's Ministry of Finance the restructuring process of Kyiv's external debt obligations would follow the restructuring of sovereign eurobond obligations.

The Cabinet of Ministers of Ukraine required the City of Kyiv 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. Additionally Ukraine had missed the payment on its eurobond, which led to the recent sovereign downgrade (see 'Fitch Downgrades Ukraine's Foreign-Currency IDRs to 'Restricted Default'' dated 6 October 2015 at www.fitchratings.com).

MEDIUM

Fiscal Performance: Fitch expects Kyiv's budgetary performance to remain volatile. This is due to the overall weakness of the sovereign's public finances, lower predictability of the country's fiscal policy and a short planning horizon, exacerbated by a negative macro-economic trend.

Economy: Fitch expects Ukraine's economy to shrink 10% yoy in 2015, which will negatively affect the city's fiscal capacity.

RATING SENSITIVITIES

Kyiv's Long-term local currency IDR will be upgraded shortly after Fitch determines that the exchange has been accepted. The new rating will be consistent with the city's prospective credit profile and debt structure. However, the rating will likely remain low, given high country risks and Ukraine's 'CCC' Country Ceiling.

Fitch would expect to downgrade the city's Long-term foreign currency IDRs 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 to 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.

The rating actions are as follows:
- Long-term foreign currency IDR: affirmed at 'C'
- Long-term local currency IDR: downgraded to 'RD' from 'C'
- Short-term foreign currency IDR: affirmed at 'C'
- National Long-term rating: downgraded to 'RD(ukr)' from 'CCC(ukr)'
- Senior unsecured domestic bonds: downgraded to 'D' from 'C'
- Senior unsecured domestic bonds: downgraded to 'D(ukr)' from 'CCC(ukr)'
- Senior unsecured eurobonds: affirmed at 'C'