Moody's Downgrades Ukraine's Ratings, Outlook Negative

- International rating company Moody's has downgraded Ukraine's long-term issuer and government debt ratings to Ca from Caa3, the outlook remained negative, due to expectations that Ukraine's government and external debt levels would remain very high, the company announced in a statement.

"The key driver of the downgrade is the likelihood of external private creditors incurring substantial losses as a result of the government's plan to restructure the majority of its outstanding Eurobonds" Moody's said. "Also included in the restructuring is the external debt of state-guaranteed entities and selected other state-owned enterprises, and the Eurobonds issued by the capital city of Kiev."

Ukraine's, a country in a state of war with Russia, negative outlook reflected the expectations that Ukraine's government and external debt levels would remain very high, in spite of the debt restructuring and plans to introduce reforms, it said in the statement.

Ukraine's debt operation was intended to provide 15.3 billion dollars of the four-year, 40 billion dollars external financing package agreed with the International Monetary Fund (IMF) and other multilateral and bilateral creditors. The package was approved by the IMF Executive Board on March 11.

"Although negotiations over the specific details of the restructuring are only now getting underway, Moody's believes that the likelihood of a distressed exchange, and hence a default on government debt taking place, is virtually 100 percent" the statement said.

The bonds' recovery value would be determined by the terms of the debt exchange and was currently being discussed with creditors, Moody's reminded. "The terms could include a grace period on principal repayments during the term of the IMF program, a reduction in the existing bonds' current coupons, which now average 7.1 percent, and a haircut on the outstanding principal" it added.

Ukraine's government and external debt would remain at very high levels even if the reforms were successful and despite the lower debt levels would be achieved by the external debt restructuring.

Moody's would consider moving the rating outlook to stable after the debt restructuring if it were to see a sustained normalization of the geopolitical situation in Eastern Ukraine, along with improvements in the country's external liquidity position.