Fitch Affirms Ukraine's City of Kharkov at 'CCC'

Fri May 16, 2014 11:39am EDT

(The following statement was released by the rating agency) MOSCOW, May 16 (Fitch) Fitch Ratings has affirmed the City of Kharkov's Long-term foreign currency Issuer Default Rating (IDR) at 'CCC' and its Short-term foreign currency IDR at 'C'. Fitch has also affirmed the city's Long-term local currency IDR at 'B-' and National Long-term rating at 'A+(ukr)'. The Outlook on the Long-term local currency IDR and National Long-term rating is Negative. Kharkov's outstanding domestic bond of UAH99.5m has been affirmed at 'B-' and 'A+(ukr)'. KEY RATING DRIVERS The city's ratings are constrained by the ratings of Ukraine (CCC/B-/Negative). Political risk in Ukraine remains high and the transition of power has a range of potential outcomes. Fitch assesses the institutional framework governing Ukrainian regions as weak. It lacks clarity and sophistication, hindering long-term development and budget planning of the subnationals. In Fitch view, the political crisis in Ukraine has escalated over the past six months, leading to further deterioration of the Ukraine's institutional framework. Positively, for 2013 Kharkov continued to record stable budgetary performance, low debt and outstanding liquidity. However, the city is exposed to refinancing risks and the contingent liabilities of a large public sector, which may put pressure on the city's budget. At end-2013, Kharkov's debt was low at 8.4% of current revenue or UAH394m. The city recorded strong debt coverage ratio (debt / current balance) of under one year and interest payments amounting to 1% of its operating revenue. Fitch expects the city's debt to remain low at around 5% of current revenue as the city does not have borrowing needs in the medium term. Kharkov needs to pay back UAH99.5m of maturing bond and UAH185m of bank loans in 2014, which is equivalent to 72% of total debt. Refinancing need is mitigated by the city's large cash balance, which stood at UAH1bn on 1 April 2014, 4x as much as its maturing debt amount. Fitch expects Kharkov to consolidate its stable budgetary performance in 2014-2016 with the operating margin easing to around 10%, from a strong 14.5% average in 2012-2013. The agency also views budget deterioration as likely following the expected contraction of the national economy (Ukraine's GRP to decline by 5% in 2014) and amid continuing political risk. The city's contingent liabilities are comparable to its direct debt levels and may put pressure on the budget, particularly as major PSEs are loss-making and depend on subsidies to sustain operations. The debt of the 10 largest public sector entities (PSEs) amounted to UAH219.8m at end-2012. Fitch assesses that the top 10 PSEs' debt at end-2013 was on average close to UAH250m in 2010-2012. Nonetheless, the city's contingent liabilities are below 10% of its current revenue and currently do not represent a substantial risk to the budget. RATING SENSITIVITIES Any downgrade of Ukraine would lead to a downgrade of the city's IDRs. A downgrade could also result from the city being unable to meet its debt service obligations due to a sharp liquidity shortage. Positive rating actions are unlikely in the medium term, given high political risk, the deteriorating institutional framework and a shrinking economy. Contact: Primary Analyst Elena Ozhegova Associate Director +7 495 956 99 87 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Konstantin Anglichanov Director +7 495 956 99 94 Committee Chairperson Christophe Parisot Managing Director +33 1 44299 134 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable criteria, 'Tax-Supported Rating Criteria', dated 14 August 2012, and 'International Local and Regional Governments Rating Criteria outside United States', dated 23 April 2014, are available on www.fitchratings.com. Applicable Criteria and Related Research: Tax-Supported Rating Criteria here International Local and Regional Governments Rating Criteria - Outside the United States here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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