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Rating action

Scope Ratings GmbH (Scope) has today downgraded Ukraine’s long-term foreign-currency issuer rating to SD from C, concluding a review of the rating initiated on 22 July 2022. Ukraine’s foreign-currency senior unsecured debt rating has been downgraded to SD* from C, concluding a review of the rating initiated on 22 July 2022. The Agency has confirmed the short-term issuer rating of S-4 in foreign currency and assigned Negative Outlook, concluding a review of the rating initiated on 22 July 2022. Ukraine’s long-term local-currency issuer and senior unsecured debt ratings have been affirmed at CCC with Negative Outlook. The short-term issuer rating in local currency has been affirmed at S-4 with Stable Outlook.

Rating drivers

The downgrade of Ukraine’s foreign-currency ratings to selective default reflects the consent¹ of the required majority of Ukraine’s Eurobond holders to the government’s proposal to defer debt repayments for two years. In line with Scope’s sovereign criteria and rating definitions, this deferral is consistent with a distressed debt restructuring. Scope will reassess Ukraine’s foreign-currency ratings consistent with Ukraine’s credit fundamentals after conclusion of the liability management exercise.

The downgrade of the foreign-currency issuer ratings reflects an analytical adjustment under the methodology’s ‘extraordinary circumstances’ to account for foreign debt restructuring.

The affirmation of Ukraine’s CCC sovereign credit rating in local-currency with Negative Outlook reflects risk to sustainability of Ukrainian debt service due to severe decline of output and fiscal stress after Russia’s escalation of the war. The assignment of Negative Outlook to the short-term issuer rating of S-4 in foreign currency reflects risk to external-sector resilience and capacity to service debt in foreign currency.

The foreign-currency issuer ratings are expected to be upgraded once the debt restructuring has been concluded and the new terms and conditions have become effective.

The local-currency ratings and/or Outlooks could be downgraded in case: the likelihood were to increase of debt restructuring or non-payment of local-currency debt.

Alternatively, the local-currency long-term rating Outlooks could be stabilised if: i) the war were to reach a momentary ceasefire; ii) the government’s debt-sustainability outlook were to improve; and/or iii) banking-system risks eased.

Core Variable Scorecard (CVS) and Qualitative Scorecard (QS)

Scope’s Core Variable Scorecard (CVS), which is based on the relative rankings of key sovereign credit fundamentals, provides a first indicative rating of ‘b+’ for Ukraine. Ukraine receives no adjustment to this indicative rating via the reserve-currency adjustment under the sovereign methodology. As such, under the methodology, ‘b+’ final indicative ratings can be adjusted by the Qualitative Scorecard (QS) by up to three notches, depending on the size of relative credit strengths or weaknesses versus peers based on analysts’ qualitative analysis, except for extraordinary circumstances under the methodology.

For Ukraine, the following credit strength is identified under the QS: ‘monetary policy framework’. Conversely, ‘macro-economic stability and sustainability’, ‘debt sustainability’, ‘debt profile and market access’, ‘resilience to short-term external shocks’, ‘banking sector performance’, ‘social risks’, and ‘institutional and political risks’ are identified as relative credit weaknesses compared with Ukraine’s sovereign peers in the QS.

The combined relative credit strengths and weaknesses under the QS generate a two-notch downside rating adjustment. A further one-notch adjustment was made at rating-committee level to account for unique geopolitical risk relevant to the sovereign linked to the ongoing war with the Russian Federation, representing an adverse contingency for the long-term outlook of the ratings. Aggregate adjustments signal a local-currency long-term credit rating of CCC for Ukraine. A further three-notch downside adjustment at rating-committee level is made to foreign-currency long-term ratings, reflecting approval for the restructuring of Eurobond debt. Aggregate adjustments signal a foreign-currency long-term credit rating of SD for Ukraine.

A rating committee has discussed and confirmed these results.

Factoring of Environment, Social and Governance (ESG)

Scope explicitly factors in ESG sustainability issues during its ratings process via the sovereign methodology’s stand-alone ESG sovereign risk pillar, with a 20% weighting under the quantitative model (CVS) as well as in the qualitative overlay (QS). Under governance-related factors under the CVS, Ukraine presents weak performance across an aggregate of the World Bank’s six Worldwide Governance Indicators (WGI) – representing a credit-rating constraint. However, since year 2015, in view of a significant institutional reform programme, percentile ranks improved across WGI. Ahead of parliamentary elections not later than October 2023, President Volodymyr Zelenskyy’s political group has seen support increase appreciably due to the President’s leadership since Russian military operations began on 24 February. In an assessment of Ukraine’s ‘institutional and political risks’ in the complementary QS, Scope evaluates this qualitative analytical category as ‘weak’ against Ukraine’s ‘b+’ indicative sovereign peer group.

Socially-related credit factors are similarly captured under Scope’s CVS quantitative model as well as QS qualitative overlay. In the CVS model, Ukraine receives strong scoring on income inequality (as captured through the ratio of the income share of the 20% of persons with the highest household incomes to the 20% of persons with the lowest household incomes), moderate marks on labour force participation rate, and below-average scoring with respect to an old-age dependency ratio. In addition, Ukraine’s comparatively modest GDP per capita (estimated of USD 4,828 in 2021) as a lower-middle-income economy and a medium (under a global comparison) level of unemployment (10.9% as of Q4 2021 for those of working age) are evaluated under the CVS. Declines of the working-age population weigh upon economic growth potential (estimated of 2.5%). In the QS assessment of Ukraine’s ‘social risks’, Scope evaluates this qualitative analytical category as ‘weak’ against the government’s ‘b+’ indicative sovereign peer group.

Finally, with respect to environmental risk – Ukraine scores poorly on the CVS on carbon emissions per unit of GDP (a proxy variable of “transition costs” in achieving a greener economic model in the long run) but Ukraine scores strongly on lesser degree of exposure and vulnerability to natural-disaster risk – the latter as measured by the World Risk Index. Ukraine’s marks are, moreover, strong under the CVS on ecological footprint of consumption compared with the country’s available biocapacity. Outside of the CVS, Ukraine ranked an improved 52nd on a 2021 Environmental Performance Index of 180 countries². Ukraine plans to reduce emissions while growing the economy, reducing poverty and simultaneously combating aggression from neighbouring Russia – aiming to curtail greenhouse gas emissions from 62% under 1990 levels as of 2019 to 65% below 1990 levels by 2030, and thereafter achieve full climate neutrality not later than 2060. However, the conflict is triggering sizeable, long-lasting environmental and climate damage as far as waterways, air and soil pollution, forest destruction, and increase of carbon footprint via the use of weapons, which contributes to raising greenhouse gas emissions. In summer 2021, Ukraine constructively took first steps towards inauguration of a green bond market. Ukraine’s environmental objectives and challenges are also considered within Scope’s QS via an assessment of ‘neutral’ on ‘environmental risks’ as compared with indicative sovereign peers.

*Editorial Note: Corrected on 18 August 2022 from ‘D’

Rating Committee
The main points discussed by the rating committee were: i) foreign debt restructuring; ii) credit strengths and weaknesses; iii) peer considerations; and iv) potential rating actions, drivers.

Rating driver references
1 Ministry of Finance of Ukraine 
2 Yale Center for Environmental Law & Policy, Environmental Performance Index 

Methodology
The methodology used for these Credit Ratings and/or Outlooks, ‘Rating Methodology: Sovereign Ratings’ (8 October 2021), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rating was not requested by the rated entity or its agents. The rating process was conducted:
With Rated Entity or Related Third Party Participation              YES
With Access to Internal Documents                                           NO
With Access to Management                                                     YES
The following material sources of information were used to prepare the credit rating: public domain and the Rated Entity.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds upon which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Levon Kameryan, Associate Director
Person responsible for approval of the rating: Dr Giacomo Barisone, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 28 January 2022. The Credit Ratings/Outlooks were last updated on 22 July 2022.

As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings of Ukraine are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Publication Calendar: Sovereign, Sub-Sovereign and Supranational Ratings" published on 7 June 2022 on www.scoperatings.com). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for deviation. In this case, the deviation was due to the consent of the required majority of Ukraine’s Eurobond holders to the government’s proposal to defer debt service payments by 24 months. This event has prompted publication of this credit rating action on a date deviating from previously scheduled release dates per Scope’s sovereign release calendar.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
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