Fitch downgrades Ukraine's long-term rating to "C" due to possible deferral of Eurobond payments

MOSCOW. July 25 (Interfax) - Fitch Ratings has downgraded Ukraine's long-term foreign currency (LTFC) issuer default rating (IDR) to "C" from "CCC" and removed all the country's ratings from Under Criteria Observation (UCO), citing the beginning of a "default-like process."

"On 20 July, the Ukrainian government formally launched a consent solicitation to defer external debt repayments for 24 months. Fitch views this as the initiation of a distressed debt exchange (DDE) process, consistent with ratings of 'C' for both the LTFC IDR and affected securities," the agency said.

Fitch said it believes the consent solicitation is likely to be accepted by investors, in which case the rating will be downgraded to "RD" (restricted default) and the affected instruments will be downgraded to "D" after the planned completion of the transaction (August 11).

Noting that serious stresses necessitate debt restructuring, Fitch said that the risk of missed payments or initiation of another DDE process is high even if the current request is not accepted as the Ukrainian government is seeking to preserve liquidity amid the heavy pressure of military spending.

"More generally, we expect a broader restructuring of the government's commercial debt will be required, although the timing remains uncertain," Fitch said.

The local currency IDR has only been downgraded to "CCC-" from "CCC."

"The lower default risk than on FC debt partly reflects the government's somewhat greater ability to service LC debt, and greater disincentives to restructure, given that 40% of domestic LC debt is held by banks (and 52% of the sector is state-owned) and a further 47% by the National Bank of Ukraine," Fitch said.

The agency recalled that the share of domestic government bonds held by nonresidents has shrunk to just 6%, so it does not expect strong international pressure on Ukraine to include the domestic debt in the broader restructuring process.

Fitch forecast that Ukraine's economy will shrink by 33% in 2022 and see a modest recovery of 4% in 2023.

The ability to meet Ukraine's extremely high financing needs into 2023 depends to a large extent on multilateral and bilateral support that is currently uncertain, and a debt restructuring is a likely condition of ongoing external support on such a scale, Fitch said.

Rival rating agency Moody's said on Friday that the anticipated deferral of Ukraine's bond payments will not completely reduce the risks of debt stability, but it did not take rating action.

Ukraine on July 20 asked investors in its Eurobonds to defer all payments on the bonds for two years as of August 1 while maintaining the current rate of return. At the end of this term, interest would be paid immediately or capitalized. Ukraine also proposed to change the terms of its GDP warrants.

The results of Ukraine's consent solicitation to holders of its Eurobonds and GDP warrants are scheduled to be announced on August 10. Holders of GDP warrants are supposed to decide by the evening of August 5 and holders of Eurobonds are supposed to make up their minds by the evening of August 9.