S&P cuts Ukraine's foreign currency rating to CCC due to debt restructuring plan
The rating change was triggered by Ukraine's official announcement that it is restructuring its foreign currency external debt to restore sovereign debt sustainability, as part of the recently agreed four-year, $15.6 billion Extended Fund Facility loan agreement with the IMF.
S&P added that the negative outlook on long-term foreign currency rating reflects risks to Ukraine's commercial debt service, given the government's debt restructuring plan.
S&P affirmed Ukraine's local currency ratings at CCC+/C and uaBB on the national scale.
Read also: Fitch affirms Ukraine foreign-currency debt rating at ‘CC,’ outlook negative
Another ratings agency, Fitch, noted that it understands that Ukraine's hryvnia-denominated public debt is not part of the debt restructuring plan. The outlook on the local currency rating is stable.
Fitch may lower the ratings further over the next 12 months if it believes that commercial debt will be included in the sovereign debt restructuring.
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"We understand that the parameters and timing of restructuring have not yet been determined and depend on the IMF's assessment of public debt sustainability, which is expected to be updated in early 2024," the statement said.
Ukraine's official creditors, including the United States, the United Kingdom, Canada, France, Germany, and Japan, agreed to extend the deferral of external debt payments until the end of the IMF program in 2027 from the previously agreed period of August 2022 to September 2024.
The group also agreed to an additional debt restructuring expected by mid-2024, but this agreement is contingent on private external creditors restructuring their debt at least as favorable a level, S&P noted.
"However, the potential restructuring is more than a year away, and the evolution of the war in Ukraine remains uncertain. To this end, the visibility of the exact scenario for commercial creditors will increase only next year,” the statement said.
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Bilateral debt accounts for only 5% of the total public debt, while Ukraine's commercial external debt accounts for about 20% of the total public debt, said S&P. Domestic government bonds (both in hryvnia and foreign currency) and debt to international financial institutions, which are not included in the restructuring plans, account for 40% and 35%, respectively.
"If a commercial debt restructuring occurs in 2024, in light of the ongoing balance of payments and fiscal challenges, we would likely consider it problematic," S&P added.
The report also says that Ukraine's medium-term macroeconomic outlook is largely dependent on the duration and evolution of the war, with a baseline assumption that there will be no cessation of hostilities soon.
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