Fitch Ratings today downgraded Bank Khreschatyk`s (Khreschatyk) UAH70m covered bonds issue to `B` from `B+` and affirmed its National Rating at `A(ukr)`, Fitch Ratings reported.

The rating action follows the downgrade of Ukraine`s sovereign rating (both foreign and local currency Issuer Default ratings downgraded to `B+` from `BB-` (BB minus) on 17 October 2008 with Outlook Negative), which is a key reference point used in Fitch`s default and cash flow analyses. Therefore, the downgrade of the covered bonds is primarily driven by negative macroeconomic trends rather than by an observed deterioration in the quality of the underlying collateral. As at 1 October 2008, the covered bonds were secured on a portfolio of mortgage loans amounting to UAH82.8m, resulting in nominal over-collateralisation (OC) of 18.3%.

The agency believes borrowers are likely facing increased economic difficulties and has therefore revised its assumptions of foreclosure and loss severity, which, according to Fitch`s structured finance criteria for emerging markets, are tied to the local currency rating of the sovereign. Fitch has also revised the stressed discount rates used to derive expected recoveries on the covered bonds in the different rating scenarios. To maintain the previous rating on the covered bonds, the cover pool, including legal minimum OC (11.1%), would therefore need to absorb higher stress levels to capture increased systemic risk.

The `B` rating on the covered bonds is based on Khreschatyk`s Long-term Issuer Default rating (IDR) of `B-` (B minus) and a discontinuity factor (D-Factor) of 100%, which indicates that the covered bonds have the same probability of default as their issuer. In addition, the rating incorporates a one-notch uplift above the bank`s IDR, reflecting stressed recoveries on the covered bonds from the cover pool in the 51% to 70% range. Previously, stressed recoveries from the cover pool were assumed in the 71% to 90% range in a `B+` scenario, justifying a two-notch uplift above the IDR, in accordance with Fitch`s rating methodology.

The covered bonds` National Rating has been affirmed at `A(ukr)` and is based on Khreschatyk`s National Long-term Rating of `BBB-(ukr)` (BBB minus) and on a recovery uplift of four notches above this rating. In Fitch`s view the downgrade of Ukraine`s sovereign rating has no significant impact on the relative expected performance of Khreschatyk` s covered bonds compared to other debt instruments issued out of Ukraine.

Fitch will continue to closely monitor Ukraine`s economic developments and the potential impact on the ratings of the covered bonds.