Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the cases of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macro-economic or financial-market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit rating’s performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review of Ukraine (long-term issuer rating in foreign currency: C/ Negative Outlook; long-term senior unsecured debt rating in foreign currency: CC/ Negative Outlook; long-term issuer and senior unsecured debt ratings in local currency: CCC/ Stable Outlook; short-term issuer ratings in local- and foreign-currency: S-4/ Stable Outlook) on 25 July 2024.

This monitoring note does not constitute a credit-rating action, nor does it indicate the likelihood that Scope will conduct a credit-rating action in the short term. Information about the latest credit-rating action connected with this monitoring note along with the associated ratings history can be found on www.scoperatings.com.

Key rating factors

For the updated Rating Report accompanying this review, click here.

Ukraine’s long-term issuer rating in foreign currency of C and Negative Outlook reflects expectation of selective default within the forthcoming period.

The Government of Ukraine announced on 22 July 2024 achievement of an agreement in principle with members of the Ad Hoc Creditor Committee – following a second round of concerted negotiations – on core financial and non-financial terms of the proposed restructuring of thirteen Ukrainian Eurobonds alongside of a single Eurobond of roads-operator Ukravtodor. The Creditor Committee is composed of institutional money managers and other long-term investors holding above 20% of the outstanding principal of Ukrainian Eurobond debt. The proposed agreement provides up to a 37% nominal haircut on the thirteen listed Eurobonds, forgoing USD 8.67bn of claims and enabling Ukraine to save USD 11.4bn on due payments over the next three years. The agreement has been confirmed by staff of the International Monetary Fund as compatible with debt-sustainability objectives outlined under the Extended Fund Facility and has been endorsed by the Group of Creditors of Ukraine.

The agreement includes an exchange of the thirteen Eurobonds for two new bonds having lengthened maturities, principal reduction and varying grace periods followed by step-ups of coupon payments. The second of the new bonds furthermore includes possibility of additional principal by 2029 should Ukraine out-perform specific guidelines on economic output. Ukraine is launching parallel debt-restructuring negotiations with holders of GDP-warrant securities not rated by Scope.

Ukraine foresees completing the Eurobond restructuring as soon as practicable, pending bondholders’ votes, requiring at minimum two-thirds of bondholders of the aggregate principal of each series of notes and at least half of the bonds of each series incorporated to approve the agreement. Under the sovereign-rating methodology, execution of this agreement would be considered a “distressed debt exchange”.

For after the conclusion on 1 August 2024 of a two-year debt-servicing suspension on Eurobonds, Ukraine approved a further law earlier this month for the temporary unilateral ban on foreign-debt payments until 1 October of this year until an agreement in principle has been concluded with Eurobond holders and voted into force. The February-2026 Eurobond has a coupon payment due 1 August. If this payment is missed and not made whole within the grace period concluding 10 August, consistent with Scope’s rating announcement of 10 May 2024, this would be considered a selective default through unilateral suspension of debt payment.

Resultantly, the foreign-currency long-term issuer and senior unsecured debt ratings are foreseen being downgraded within the coming weeks to selective default if: i) the agreement in principle concerning restructuring of Eurobond instruments is approved by holders of at minimum two-thirds of the aggregate principal of a given series of Eurobond debt; or ii) Ukraine unilaterally suspends debt service following conclusion on 1 August 2024 of the existing debt-servicing suspension and does not make whole any missed payments within a grace period.

Conversely, the Outlook for the long-term issuer rating in foreign currency could be revised to Stable (from Negative) if: Ukraine changes the existing law and decides to resume debt servicing on Eurobonds after 1 August 2024 and the agreement in principle is not voted through by any series of Eurobonds. Scope considers this scenario highly unlikely.

The ratings and/or Outlooks on Ukraine’s CCC-rated domestic debt could be downgraded if: the likelihood were to increase of the restructuring of the domestic debt, such as under a scenario of the war worsening for Ukraine and the debt-sustainability outlook remaining impaired even following comprehensive external liability restructuring. Alternatively, the domestic-debt ratings and/or Outlooks could be upgraded if: i) security risks were to be significantly reduced; ii) the government’s debt-sustainability outlook were to meaningfully improve; and/or iii) banking-system risks ease.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Rating Methodology, 29 January 2024) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Dennis Shen, Senior Director.

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