Fitch affirms Ukraine’s Long-term foreign currency rating at 'CC' level

The issue ratings on Ukraine's senior unsecured foreign and local currency bonds have also been affirmed at 'CC' and 'CCC', respectively. Domestic foreign-currency bonds are not included in this rating action. The Country Ceiling has been affirmed at 'CCC' and the Short-term foreign currency IDR at 'C,' the report says.

The government is negotiating with bondholders a restructuring of its sovereign external bonds, which Fitch would classify as a Distressed Debt Exchange. Meanwhile, it continues to service external and domestic obligations, paying $120 million coupon on its 2017 Eurobond on July 24. On the announcement of a debt restructuring deal Fitch would expect to downgrade Ukraine's Long-term foreign currency IDR to 'C'. Fitch would expect Ukraine to have completed the restructuring before $500 million Eurobond maturity payable on September 23 and the second review of the IMF program, also in September. If a timely restructuring is not agreed, Ukraine may declare a moratorium on external Eurobond debt service.

Reaching a debt restructuring agreement with bondholders is a condition of the Extended Fund Facility (EFF) agreement with the IMF reached in March 2015. The deal offers $17.5 billion in IMF financing, plus multilateral and bilateral assistance including from the EU and the World Bank. The government pledged to seek $15.3 billion in balance of payments savings over 2015-2018 from holders of $23 billion in sovereign and sovereign-guaranteed external debt. On July 31, Ukraine passed the first review of the program and the IMF board agreed to disburse the second $1.7 billion disbursement.

Growth volatility, fragile external and public finances, weak governance indicators and geopolitical risks constrain the ratings. Domestic debt is not included in the restructuring proposal, but Fitch considers 'CCC' an appropriate level for the local currency rating, given Ukraine's economic and policy challenges. The IMF expects real GDP to shrink 9% in 2015, after a 7% contraction in 2014. Fitch assumes that real GDP will stabilize in 2016 as inflation and interest rates subside and confidence improves, assuming that policy and geopolitical risks do not materially worsen. Conflict between the government and separatists in the eastern regions of Donetsk and Luhansk has caused a humanitarian crisis, damaged the industrial base and curtailed trade with Russia.