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Related Issuers
Rating Action:

Moody's upgrades rating of Kyiv and changes the outlook to positive from stable

01 Sep 2017

London, 01 September 2017 -- Moody's Public Sector Europe ("MPSE") has today upgraded the City of Kyiv's long-term issuer rating to Caa3 from Ca. At the same time, it has changed the rating's outlook to positive from stable.

This rating action follows Moody's decision to upgrade the Ukraine government bond rating to Caa2 from Caa3 and to change the outlook to positive from stable on 25 August 2017. For additional information, please refer to the sovereign press release: http://www.moodys.com/viewresearchdoc.aspx?docid=PR_370205.

RATINGS RATIONALE

Moody's rating action on the City of Kyiv reflects Moody's assessment of the improvement in the operating environment for Ukrainian sub-sovereigns, as captured in the rating action on the sovereign bond rating. The sovereign rating upgrade indicates a reduction in the systemic risk to which the Ukrainian local governments are exposed given their close financial and operational linkages with the central government. In addition, the institutional linkages intensify the close ties between the two levels of government through the sovereign's ability to change the institutional framework under which Ukrainian local governments operate.

Further, Ukrainian local governments depend on revenues that are linked to the sovereign's macroeconomic and fiscal performance. In particular, Kyiv's budgetary structure limits its fiscal independence from the sovereign, as Kyiv derives approximately 65% of its operating revenue from shared taxes and an additional 25% from state transfers.

Kyiv has improved its operating surpluses to 37% of operating revenue in 2016 from 28% in 2015 and 15% in 2014, which was driven by rapid tax revenue growth and supported by additional taxes allocated to local governments after the changes in the institutional framework, and high inflation.

The upgrade of Kyiv's issuer rating also reflects the city's timely repayment of domestic bonds (series G -- of UAH1.915 billion) in 2016, thus resolving the risk caused by Kyiv's previous decision to postpone this repayment for another year. The entire amount was paid from the city's own cash reserves, leaving the city with no outstanding local currency bonds, which significantly eases financial pressure from the city's budget.

Kyiv completed a debt restructuring of $448.9 million from two eurobonds totalling $550 million via an exchange to Ukraine sovereign debt in December 2015. The city restructured its $300 million bonds due 2016 and 60% of $250 million bonds due 2015. According to the terms of agreement, the debt restructuring with Ukraine's Ministry of Finance envisaged the conversion of the bonds into sovereign debt. Kyiv will make semi-annual payments to the state budget related to this debt servicing and will repay the principal by two instalments in 2019 and 2020. The remaining part of Kyiv's $250 million eurobond ($101.15 million) was not restructured as one of the bondholders refused the restructuring terms. However, given the progress made so far in negotiations with creditors, Moody's expects that the city will restructure its foreign-currency debt by the end of 2017.

Despite a 25% haircut on the foreign currency debt during restructuring and successful repayment of the local currency bonds, Kyiv's debt burden remains relatively high, representing 56% of operating revenue, a decline from 78% in 2015 and 91% in 2014. However, the restructuring of the foreign currency debt has significantly extended the maturity profile of the city's debt. As a result, at year-end 2016, the short-term portion of the direct debt (including defaulted bonds) has been reduced to 17% of direct debt (from over 30% in 2015 and very high 52% in 2014).

Moody's notes that the growing financial surpluses have increased Kyiv's cash reserves, averaging 20% of operating revenue in H1 2017 compared with 9% throughout 2016, which provides a comfortable financial cushion against potential budgetary pressures.

RATIONALE FOR POSITIVE OUTLOOK

The positive outlook on Kyiv's rating reflects the city's continuity in pursuing positive financial results and debt reduction in a challenging economic environment. According to the budget projections, Kyiv will post solid, albeit declining, operating margin in the range of 30% operating revenue in 2017. Moody's expects operating margin to fall on the back of accumulated spending pressures and ongoing minimum wage increases. However, Moody's expects that the favourable medium-term growth prospects will translate into rising receipts from shared taxes and own-source revenues.

WHAT COULD MOVE THE RATING UP/DOWN

A further decrease in the city's debt burden associated with a continuation of good budgetary results would lead to an upgrade of Kyiv's rating. Any improvement in the local governments' expenditure flexibility and ability to raise additional own source revenues would be considered positively.

Although unlikely given the recent sovereign upgrade, a deterioration of the sovereign credit strength would apply downward pressure on Kyiv's ratings, given the close financial, institutional and operational linkages between the two tiers of government. Significant financial deterioration driven by systemic or individual factors or an unexpected sharp increase in debt as well as the emergence of liquidity risks would also exert downward pressure on the ratings.

The sovereign action required the publication of this credit rating action on a date that deviates from the previously scheduled release date in the sovereign release calendar, published on www.moodys.com

The specific economic indicators, as required by EU regulation, are not available for this entity. The following national economic indicators are relevant to the sovereign rating, which was used as an input to this credit rating action.

Sovereign Issuer: Ukraine, Government of

GDP per capita (PPP basis, US$): 8,305 (2016 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 2.3% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 12.4% (2016 Actual)

Gen. Gov. Financial Balance/GDP: -2.2% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -4.1% (2016 Actual) (also known as External Balance)

External debt/GDP: 121.7% (2016 Actual)

Level of economic development: Very Low level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 28 August 2017, a rating committee was called to discuss the rating of the Kyiv, City of. The main points raised during the discussion were: The systemic risk in which the issuer operates has materially decreased.

The principal methodology used in these ratings was Regional and Local Governments published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Gjorgji Josifov
Asst Vice President - Analyst
Sub-Sovereign Group
Moody's Investors Service EMEA Ltd. Czech Branch
Washingtonova 17
110 00 Praha 1 (Prague 1)
Prague
Czech Republic
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Mauro Crisafulli
Associate Managing Director
Sub-Sovereign Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service EMEA Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any rating, agreed to pay to Moody’s Investors Service, Inc. for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”

Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be reckless and inappropriate for retail investors to use MOODY’S credit ratings or publications when making an investment decision. If in doubt you should contact your financial or other professional adviser.

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Moody’s Public Sector Europe is the trading name of Moody’s Investors Service EMEA Limited, a company incorporated in England with registered number 8922701 that operates as part of the Moody’s Investors Service division of the Moody’s group of companies.
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