Fitch Upgrades Ukraine from Default, Raises Rating to CCC

Kyiv, November 19, 2015. International rating agency Fitch Ratings today announced a significant step regarding Ukraine. The country’s long-term foreign currency rating has been upgraded from RD (Restricted Default) to CCC. This decision formally removes Ukraine from the default status into which the agency had placed it at the end of July.

Reason for the Upgrade: Completion of Debt Restructuring

As reports RBC-Ukraine, the decision is directly related to the government’s successful completion of the sovereign Eurobond restructuring operation. In October, the overwhelming majority of private creditors agreed to the terms proposed by the Cabinet of Ministers, which allowed reducing the debt burden on the state budget and fulfilling a key requirement of the International Monetary Fund to continue the financing program.

The rating upgrade is a technical but extremely important signal for international financial markets. It means that Fitch acknowledges the resolution of the situation with debt obligations to private investors and considers the default on these securities to be cured.

Separate Position on $3 Billion Russian Debt

The agency’s statement pays special attention to the contentious debt to the Russian Federation amounting to $3 billion (approximately £2 billion GBP at the exchange rate of 19.11.2015*) on bonds issued in December 2013. Fitch provides its interpretation, which mitigates potential risks for Ukraine.

“Fitch also assumes that any legal actions resulting from non-payment of this debt will not impede the servicing of new external debt,” the release notes.

Moreover, the agency explicitly states that non-payment of this debt to Russia will not automatically constitute a new default under Fitch’s methodology. This creates an important buffer for Ukraine, separating this political issue from the overall assessment of the country’s creditworthiness in the eyes of other creditors.

What Does the CCC Rating Mean?

Despite clear progress, Ukraine’s new rating — CCC — remains in the category of very high credit risk. According to Fitch’s definition, this means default is a real possibility. The CCC level is just one notch above a default rating and reflects the ongoing fragility of the country’s economic and financial situation.

The main pressure factors, evident as of today, remain:

• Deep Recession: The economy is in a state of acute crisis, and GDP continues to contract.
• Security Tensions: The military conflict in the east of the country creates constant operational and budgetary risks.
• Dependence on External Support: The stability of the financial system and the hryvnia exchange rate critically depend on continued cooperation with the IMF and other international partners.

Individual economists point to a number of other factors, but most experts I have surveyed agree with those mentioned.

One Stage Completed, Difficult Work Ahead

Today’s Fitch decision is, first and foremost, the closing of the chapter on the default to private creditors. It confirms that the Ukrainian authorities managed to conduct extremely difficult negotiations and fulfill one of the tough conditions set by international financial institutions.

However, it is too early to celebrate victory. The CCC rating is not an assessment of stability but a warning. It indicates that the country is at the beginning of a long and difficult path to restoring investor confidence. Further rating dynamics will depend on Ukraine’s ability not only to receive external assistance but also to consistently implement painful structural reforms, ensure macroeconomic stability, and create conditions for the return of economic growth.

For international investors and funds, the upgrade from default status is a prerequisite for considering Ukrainian assets again, albeit with extreme caution. It may gradually lower the risk premium demanded for holding Ukrainian debt and equity.

Today’s decision is a green light to continue on this path, but not a guarantee of its successful completion.

*For reference: exchange rate as of 19.11.2015 – 1 USD ≈ 0.66 GBP. The debt amount in GBP is approximate. Source: ves.biz.ua.