We regard Kyiv's liquidity position as "very negative". The city's free cash position will remain volatile and its access to external liquidity "uncertain". Given its high debt service, this will continuously expose Kyiv to material refinancing risks in the medium term (see "BICRA On Ukraine Revised To Group '9' From Group '10'," published Nov. 9, 2011, on RatingsDirect on the Global Credit Portal). Debt service is likely to stay at a material 10% on average in 2013-2014, despite a reduction after a peak of above 20% of operating revenues in 2012. This will be due to Kyiv's high debt burden and persistently high interest payments, the latter of which results from existing tight capital market conditions.
The city's material debt repayment needs in the next 12 months consist of foreign currency-denominated loan-participation notes (LPNs) and bank loans. Our base-case scenario assumes Kyiv will refinance the LPN with a new bond (with the first tranche having already been placed in July 2012) and extend existing bank loans.
Since all LRG borrowing is subject to Ministry of Finance approval, the timely and adequate institutional and legal support of the sovereign remains a key assumption of our base-case scenario. Moreover, given that bank loans were imposed on the city by the sovereign in 2009-2010 to cover energy payables, we expect the central government will play a crucial role in repaying and refinancing these obligations. This assumption is evidenced by the loan from OJSC Alfa-Bank (BB/Positive/B; Russia national scale 'ruAA')/ Alfa-Bank Ukraine (B-/Stable/C; Ukraine national scale 'uaBBB-'), the larger part of which was repaid using central government pass-through funds in July 2012.
The '4' recovery rating on Kyiv's LPNs indicates our expectation of average (30%-50%) recovery in an event of payment default. For more information see "Recovery Ratings Assigned To Debt Of 22 LRGs; Issue Ratings On Those 22 LRGs Affirmed," published on May 24, 2010, on RatingsDirect.
The stable outlook reflects our expectation that, despite turbulent capital market conditions and a very weak cash position, Kyiv will pass the peak of its debt in 2012 given its positive refinancing track record. The outlook also factors in a continued recovery of Kyiv's operating financial performance through 2013, supported by a recovering economy and continued operating support from the sovereign, which should allow the city to avoid further debt accumulation.
Positive rating actions would hinge on stronger budgetary performance, with operating surpluses approaching 7%-8% in 2012-2013 or improved terms of borrowings or refinancing that would result in stronger self-financing capacity and a lower debt burden. The continuing reduction of the payables of Kyiv's related entities, which would lead to lower contingent risk, would also support ratings upside.
We could take a negative rating action if credit market turbulence impeded the city's plans to refinance, especially in the absence of alternative debt repayment scenarios. Beyond the 2012 refinancing plan, ratings downside might be triggered by the city's operating performance dipping into the red, which would put Kyiv's capacity for interest payments under pressure, especially if state support were weaker. These factors would most likely also change our assessment of the city's quality of financial management.
Related Criteria And Research
-- Methodology For Rating International Local And Regional Governments, Sept. 20, 2010
-- Assigning Recovery Ratings To International Local And Regional Governments' Speculative-Grade Debt, Feb. 3, 2009
-- BICRA On Ukraine Revised To Group '9' From Group '10', Nov. 9, 2011
Kyiv (City of)
Issuer Credit Rating B-/Stable/--
Senior Unsecured B-
Recovery Rating 4
Kyiv Finance PLC
Senior Unsecured B-
Recovery Rating 4