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
