Moody's upgrades Ukraine's sovereign rating to "Caa3", outlook changed to "stable"

"The nine new bonds created in Ukraine's debt exchange operation were rated Caa3, and the ratings of the 13 bonds they replaced – including the three bonds issued by a government-guaranteed entity called Financing of Infrastructural Projects (Fininpro) in 2011 – were withdrawn," Moody's said. "The decision to upgrade the sovereign rating of Ukraine's government to Caa3 is based on the following key drivers: [the] settlement of the restructuring of $15 billion in privately-held eurobonds issued or guaranteed by the government, which eases Ukraine's debt-service requirements and strengthens the country's external liquidity; and progress in political and economic reform under the auspices of the IMF-led programme, supporting a rebalancing of the economy and a meaningful reduction in public and external financial deficits," the agency said. Moody's says its decision to assign a stable outlook on the government's Caa3 issuer rating reflects the current balance of risks, taking into account both the stronger external position – including an easing of debt service requirements in the coming years – and continuing multilateral/bilateral financial support, against a still highly fragile political and economic situation. Also, increased compliance with the Minsk Peace Protocol since September appears to have diminished the risk of a renewed escalation of the military conflict in the eastern regions of the country. The rating agency adds however that implementation risks under the IMF Extended Fund Facility (EFF), which is the fundamental framework behind the roughly $25 billion in official financial support being provided to Ukraine, remain significant given the challenging environment and are therefore an important constraint on the rating. Concurrently, Moody's affirmed the Ca rating of the government's $3 billion bond scheduled to mature on December 20, 2015. The bond was not part of the debt exchange and therefore entails a higher level of risk than the new bonds just issued because Ukrainian officials have stated that this bond will not be paid on the due date. In a related move, Moody's raised the country ceiling for foreign currency bonds to Caa2 from Caa3, whereas the country ceiling for foreign currency deposits was left unchanged at Ca. The country ceilings for local currency debt and deposits were also left unchanged at Caa2. Country ceilings generally determine the highest rating that can be assigned to obligations of an issuer resident within a given country. Moody's on March 24, 2015 downgraded the long-term issuer rating of Ukraine to "Ca" from "Caa3", pointing to the possibility of "significant" losses of holders of Ukrainian bonds and evaluating the probability of the country's default on its bonds at nearly 100%.