Fitch Ratings, following the sovereign ratings, has revised the outlook for long-term issuer default ratings (IDR) of Kyiv, Kharkiv, Lviv, Odesa and Dnipro in foreign and national currency from “positive” to “stable” and affirmed the IDR at “B.”
“While Ukrainian local and regional governments’ (LRGs) most recently available data may not have indicated performance impairment, material changes in revenue and cost profiles are occurring across the sector and likely to worsen in the coming weeks and months as economic activity suffers and government restrictions are maintained or broadened,” Fitch said on its website.
“Kyiv’s market debt is primarily a $115.1 million eurobond, in the form of local participation notes (LPNs) issued by PBR Kyiv Finance PLC in September 2018. The Eurobond bears a 7.5% semi-annual coupon and is due in in four equal bi-annual instalments in 2021 and 2022. The city also has $175.5 million obligations to Ukraine’s Ministry of Finance. This is a result of an exchange of Kyiv’s eurobonds into Ukraine sovereign debt in December 2015. According to the terms of the debt exchange, Kyiv makes bi-annual payments to compensate for the coupon payment related to the eurobond. The outstanding principal is to be repaid in 2020. Fitch treats this debt as an inter-governmental loan,” the report says.
“In addition Kyiv remains exposed to contingent risk stemming from public-sector companies. The city had outstanding guarantees totaling about 17.8 million euro as of April 1, 2020 to support projects in public transportation, infrastructure and energy saving. The guaranteed loans are euro-denominated and relate to two city-owned companies, Kyivpastrans and Kyivmetropoliten. The guarantees expire in 2021 and the city currently provides funding to the companies to service these liabilities, so Fitch includes them into the city’s adjusted debt,” Fitch stated.
“Kharkiv’s net adjusted debt was at low Hr 123 million in 2019 as the only form of debt was a Hr 500 million domestic bond issued in H2, 2019 with maturity in 2022. In Q1, 2020 the city issued another Hr 250 million tranche of the domestic bond. Fitch’s rating case expects the city’s net adjusted debt to increase to more than Hr 7 billion, which still does not pressurize its debt metrics. In its scenario Fitch included the bulk of municipal companies’ debt into the city’s adjusted debt as we assume it could crystallize as Kharkiv’s direct obligations under the unfavorable economic conditions,” Fitch experts noted.
“The debt of municipal companies amounted to around Hr 1.6 billion at the beginning of 2019 (the latest available data), which corresponded to 11% of operating revenue. Part of the municipal companies’ debt is from local banks and part is borrowed in foreign currency from international financial institutions, which creates FX risk. The city guaranteed the debt of Kharkiv water supply company (Hr 90 million as of the beginning of 2019),” according to the document.
“Lviv’s net adjusted debt was at a low Hr 1.7 billion at end-2019, comprising Hr 740 million direct debt and Hr 1.2 billion guaranteed incurred debt of municipal companies. The latter would materialize as Lviv’s direct obligations under unfavorable economic conditions. In our rating case, net adjusted debt is expected to increase toward Hr 6.4 billion, which would lead to deterioration of the fiscal debt burden towards 64% by end-2024 from 18% in 2019. Growth is driven by a weaker operating balance due to prudent assumptions in tax revenue- and operating expenditure-growth, while the city’s and municipal companies’ investment programs are expected to be maintained,” the report says.
”Odesa resumed borrowing in 2017 and entered into medium-term loans with local banks and a loan with the Nordic Environment Finance Corporation. Odesa’s debt portfolio (2019: Hr 1.9 billion) is solely in local currency and has fixed interest rates. Debt repayments are smooth (quarterly or semi-annual), reducing refinancing risk. Final debt maturity is in 2024,” the rating agency said.
“Odesa supports investments made through the municipal companies, taking advantage of the loans from international institutions such as the EBRD/World Bank. The loans, granted in euros and U.S. dollars are guaranteed by the city. In 2019, the value of these guarantees totaled Hr 843 million and may rise further if the city’s transportation company starts to construct the ‘North-South’ tram route. Fitch has decided to include the guaranteed debt of the city’s companies into “Other Fitch-classified debt” and thus in net adjusted debt of the city as Odesa supports the repayment of debt (including FX risk) through its budget (capital injections to companies),” it says.
