Fitch downgrades Ukraine to pre-default 'RD'

MOSCOW. Aug 14 (Interfax) - Fitch Ratings has downgraded Ukraine's Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) to 'RD' or restricted default from 'C', Ukrainian media reported, quoting the rating agency's press release.

Fitch does not assign outlooks to sovereigns with a rating of 'CCC+' or below.

Fitch has also downgraded the rating on the $750 million Eurobond maturing in 2026 to 'D' from 'C' and affirmed the other foreign-currency bonds at 'C.'

Fitch has withdrawn the issue ratings of Ukraine's foreign-currency bonds as they are no longer considered to be relevant to the agency's coverage.

The Long-Term Local-Currency (LTLC) IDR or 'CCC-' and country ceiling of 'B-' were affirmed.

"The downgrade of Ukraine's LTFC IDR to 'RD' follows the expiration of the 10-day grace period for the 2026 USD750 million Eurobond coupon payment due on 1 August. This marks an event of default under Fitch's criteria with respect to the sovereign's IDR as well as the individual issue rating of the affected security. On July 18, the Ukrainian parliament approved legislation that allows the government to temporarily suspend payments on state and state-guaranteed external commercial debt until a restructuring agreement with external commercial debt creditors is completed," Fitch said.

It also said that on August 9, the Ukrainian government formally launched a consent solicitation to restructure its outstanding $19.7 billion sovereign Eurobonds and $0.7 billion state-guaranteed Ukravtodor bonds. In Fitch's view, the exchange offer constitutes a distressed debt exchange (DDE) under its sovereign rating criteria, as it involves a material reduction in terms, including reductions in principal amount and interest, and extension of maturities.

"The higher rating for local-currency (LC) debt reflects our expectation that Ukraine will continue to service its LC debt and that LC debt will be excluded from a restructuring agreement with external commercial creditors, partly because only 2.2% of it is held by non-residents, compared with 41.4% held by National Bank of Ukraine and 42% by domestic banks (mostly state-owned banks)," Fitch said.

Ukraine announced on July 22 that it had reached agreement in principle on restructuring with an ad hoc committee of holders of its Eurobonds totaling about $23 billion that call for writing off 37% of the debt with the possibility of restoring 12% if the country reaches a certain GDP level in 2028.

For the remaining debt, Ukraine will issue new Eurobonds maturing in 2029-2036 with a yield that will gradually grow from 1.75% in the next few years to 7.75% at the end of the term. Payment for consent will be 1.25% of the amount of bonds being exchanged.

Ukraine initially expected to conclude all negotiations with bondholders by August 1, the deadline for payments under the terms of a 2022 restructuring. But this did not happen and as of August 1 the government imposed a temporary moratorium on Eurobond payments for the duration of the restructuring.

Under the conditions of the exchange offer and consent solicitation that Ukraine published on August 9, the deadline for bondholders to submit instructions to participate in the exchange is August 27, the results will be announced on August 28 and all settlements will be made on August 30 and the subsequent five days.

In order to go ahead, the exchange requires the consent of two thirds of all bondholders and at least half of the holders of each issue, on the condition that less than a quarter of holders of each issue are opposed to such consent.