REUTERS
Standard & Poor's Ratings Services lowered its long- and short-term foreign currency sovereign credit ratings on Ukraine to 'SD' (selective default) from 'CC/C' on September 25, 2015 against the background of Ukraine’s distressed debt restructuring.
“The rating action follows the Ukrainian government’s September 23 invitation to commercial bondholders to participate in a series of debt buyback auctions,” reads the S&P report.
At the same time the agency affirmed its 'CCC+/C' long- and short-term local currency ratings. “Ukraine’s long-term and short-term local currency ratings are not affected, as no local currency debt is included in the exchange offer,” according to the report.
S&P states that it understands that the bondholders may either accept or refuse Ukraine’s offer at the meetings on October 14.
At these meetings, holders will vote either to accept or refuse the offer.
The key points of Ukraine’s offer to bondholders includes a 20% haircut on principal, a deferral of $11.5 billion in principal payments until after 2019, and Ukraine's issuance of a 20-year value recovery instrument (GDP linked securities) coming into effect from 2021.
If the exchange is completed, S&P will likely consider the selective default to be cured and raise the sovereign credit foreign currency rating on Ukraine to at least the 'CCC' category, “reflecting its forward-looking assessment of Ukraine’s creditworthiness.”
S&P also keeps in mind that the IMF is yet to determine the status of a foreign law bond, sold in December 2013 by the former Ukrainian government to the Russian government's National Wealth Fund, and maturing in December 2015. The Ukrainian government insists this bond will be part of the talks, while the Russian government maintains that the bond, although fully negotiable, should be classified as "official" rather than "commercial" debt, given its below-market interest rate at issue and the fact that it was purchased by a government entity.
The Finance Ministry of Ukraine stated that "this action of rating agencies is expected, technical and temporary. After the legal completion of the restructuring process, we expect the revision and improvement of the sovereign rating by international rating agencies, as happened during and after the legal conclusion of the deal on re-profiling of Eurobonds of Ukreximbank and Oschadbank."
The Finance Ministry stressed that the potential reduction in the sovereign ratings of Ukraine would not have a significant impact on the process of debt restructuring.