S&P may rate new UKRAIN bonds at B-, even if Ukraine defaults to Russia

The Standard & Poor’s ratings agency upgraded Ukraine’s long-term foreign currency sovereign rating to “B-” from “SD” / ”D” with a stable outlook, the agency reported on Oct. 19. The upgrade means, all else being equal, that S&P will assign a “B-” rating to Ukraine’s new Eurobonds that will be issued in exchange for the current bonds. The rating of the existing bonds (UKRAIN) will remain at “D” level.

The upgrade reflects Ukraine’s gradual implementation of reforms that support fiscal, financial, and economic stability and an increase of its international reserves, S&P stated. The country has completed a distressed debt exchange that diminished the risk of another default in the next two-three years, in the view of S&P analysts.

The S&P rating action does not rule out the scenario that Ukraine will not repay on time (by Dec. 20) the USD 3 bln Eurobonds owned by Russian state fund (the only party to have held out in the debt operation). S&P analysts believe than in this case, the IMF will continue to cooperate with Ukraine under its “lending into arrears” policy.

Alexander Paraschiy: This is an unexpectedly strong upgrade of Ukraine’s rating, which demonstrates the increasing optimism of international analysts about the country’s economic and financial situation. The last time Ukrainian bonds had such a high rating was during Nov. 2013 – Jan. 2014, or at the start of the Revolution of Dignity. Importantly, the S&P hinted that its rating won’t be downgraded even if Ukraine defaults to the Russian fund, which is a good indicator of broad international support for Ukraine’s tough position regarding the Russian debt holder.