Rating action

Scope Ratings GmbH (Scope) has today affirmed Ukraine’s long-term issuer and senior unsecured debt-category ratings in foreign currency at selective default (SD). No Outlook is assigned on ratings in selective default.

The rated Eurobond instruments for exchange (as listed within the rating announcement) have been downgraded to D* from C, concluding the review for downgrade initiated on 15 August 2024, reflecting average recovery for the securities on net-present-value bases compared against that of historical sovereign restructuring events. No Outlook is assigned. Scope debt-instrument ratings are evaluated on the expected loss given default. Thereafter, ratings of the nine rated Eurobond instruments are withdrawn due to debt exchange.

In addition, Scope assigns instrument ratings on the new Eurobond securities (as listed within the rating announcement) of CCC with Stable Outlook.

The long-term issuer and senior-unsecured debt ratings in local currency are left unchanged at CCC, with Stable Outlooks. Scope has left unchanged the short-term issuer ratings of Ukraine in local- and foreign-currency at S-4, having Stable Outlooks. The long-term domestic debt instrument ratings of Ukraine in local- and in foreign-currency are left unchanged at CCC, and Stable Outlooks are unchanged.

The affirmation of Ukraine’s long-term issuer and senior unsecured debt-category ratings in foreign currency at selective default represents approval of Eurobond holders of the Debt Exchange and Consent Solicitation announced 28 August 2024. Bond holders voted through the Consent Solicitation with above 97.38% of the aggregate principal across the 14 Eurobonds consenting. This agreement settled 30 August 2024.

Download the rating report.

Key rating drivers

Eurobond restructuring approved with settlement 30 August 2024.

The Exchange Offer and Consent Solicitation for the restructuring of 13 Ukrainian Eurobonds alongside of a single sovereign-guaranteed Eurobond of roads-operator Ukravtodor were launched 9 August 2024¹. This restructuring was announced on 28 August² as approved by Eurobond holders, with above 97.38% of holders of aggregate principal of the existing Eurobonds consenting. Consenting bond holders see effectively a 35.75% write-off after a consent payment (alongside possibility of further curtailment to as low as 23.75% should Ukrainian nominal GDP out-perform).

The early consent deadline (formerly of 23 August) was extended³ to align with the ending voting deadline of 27 August – meaning all consenting bond holders receive the consent payment (of 1.25% of the pre-restructuring aggregate Eurobond principal) – enhancing recovery. Non-consenting bondholders face a deeper write-off of 49.65%. Accounting for the high rate of participation, the effective face-value haircut is 36.1% excluding added contingent principal on the final two series of Bond B. Under net-present-value (NPV) terms, the NPV haircut is around 50% on the securities (excluding the contingent added principal on Bond B). The restructuring took effect 30 August.

The approval of the Eurobond restructuring required a minimum of two-thirds of bond holders of the aggregate principal of each series of notes and at least half of the bonds of each series incorporated. Under the sovereign-rating methodology, execution of the agreement is considered a “distressed debt exchange”.

The agreement forgoes USD 8.67bn of claims and enables Ukraine to save USD 22.75bn in debt payments by 2033⁴. The agreement has been endorsed by the International Monetary Fund as compatible with debt-sustainability objectives outlined under the Extended Fund Facility (EFF) and the Group of (G-7) Creditors of Ukraine. The agreement includes the exchange of the 14 existing Eurobonds for two new bond “parts” each having four bond series having lengthened maturities, principal reductions and varying step-ups of coupon payments. The final two bond series of the second part (or Bond B) furthermore can add additional principal by 2029 if Ukraine outperforms specific economic performance benchmarks.

Ukraine unilateral suspension of debt service following the conclusion of the two-year bilaterally-agreed debt-servicing suspension on 31 July 2024. The long-term issuer ratings in foreign currency entered selective default on 15 August following moratorium of Eurobond debt servicing since 1 August 2024.

Ukraine approved a law⁵ last month adopting a temporary ban of select foreign-debt payments from 1 August until as late as 1 October of this year and specifically until after Eurobond restructuring has entered effect. The February-2026 Eurobond had a coupon payment due 1 August 2024. This payment was bypassed as anticipated – as Ukraine plans not to service existing Eurobond securities until after settlement of Eurobond restructuring. The payment was not made whole within the associated 10-day grace. This was considered a selective default through Ukraine having unilaterally suspended debt payments.

Ukraine plans to negotiate restructuring of additional parameter (external) claims over the forthcoming months with negotiations set to begin following conclusion of the Eurobond exchange. This concerns: i) sovereign-guaranteed Ukrenergo notes (due 2028); ii) GDP-warrant securities (maturing 2041); and iii) external commercial loans. The referenced debt instruments are not rated by Scope but are relevant for the long-term issuer rating in foreign currency.

Ukraine amended the debt-servicing moratorium law on 27 August⁶ announcing a payment moratorium for referenced additional perimeter claims: specifically, payment suspension on external commercial loans from American-corporate Cargill from 3 September 2024; of Ukrenergo notes starting 9 November 2024; and the warrant derivatives beginning 31 May 2025.

The loans from Cargill amounted to a modest USD 0.7bn as of end-July (0.4% of GDP); the Ukrenergo notes amount to USD 0.825bn (0.5% of GDP). The warrant securities are the most consequential from a debt-servicing angle.

The long-term debt-sustainability outlook remains challenging even following Eurobond restructuring, so long as war continues. There has been an improvement of the long-run debt-sustainability outlook because of the Eurobond debt exchange. Nevertheless, the debt-sustainability outlook remains challenging even following completion of the Eurobond debt operation and scheduled restructuring of some of the bilateral official debt by 2027.

After the Eurobond restructuring – shaving around 5.1pps from general government debt/GDP from the write-off under effective terms, debt-to-GDP remains forecast to rise to around 92.2% of GDP at end-2024 and remain slightly under 100% of GDP over the forecast horizon to 2029. This reflects a rise from an estimated 84.4% of GDP as of end-2023 and 48.9% as of 2021 before escalation of the war. This is more conservative than the IMF, for which a pre-restructuring baseline scenario under the fourth review of the EFF of Ukraine⁷ forecast debt of 97.3% of GDP by end-2024 before declining to 73.5% by end-2033. The IMF assumes the war winds down by end-2024. Current challenges consider higher government deficits than forecast amid high military expenditure, weaker assumptions on economic recovery and inflation, and more significant currency depreciation assumed for this year.

The challenges for the post-restructuring ratings of external commercial debt reflect most Ukrainian debt service remaining on domestic debt instruments, which are not up for re-profiling so long as the war continues under the current intense phase. The majority of remaining debt service and around half of the aggregate principal of Ukrainian debt is furthermore linked to multi-lateral loans, where multi-lateral institutions do not participate under debt relief. Resultantly, the less than 10% (of Ukrainian debt) and declining segment representing Eurobond securities post-restructuring might remain sub-ordinated, and additional restructuring of Eurobond debt is feasible under any scenario of extended conflict.

*NB. Scope debt-instrument ratings are evaluated on loss-given-default bases, while issuer and debt-category ratings are evaluated on the probability of default.

Outlook and rating sensitivities

There is no Outlook assigned on the foreign-currency issuer rating at the selective-default grade.

The upside scenario for the long-term issuer rating in foreign currency is:

1. External commercial debt restructurings are completed and/or debt-servicing moratoria are lifted on select external commercial claims.
    

The Stable Outlook on the domestic debt ratings represents the consideration that risks for the ratings are balanced.

Upside scenarios for the domestic debt ratings and Outlooks are if (individually or collectively):

1. Security risks were to be significantly reduced;
    
2. The government’s debt-sustainability outlook were to meaningfully improve; and/or
    
3. Banking-system risks ease.

The downside scenario for the domestic debt ratings and Outlooks is if:

1. The likelihood were to increase of the re-profiling of the domestic debt, such as under a scenario of the war worsening for Ukraine and/or the debt-sustainability outlook remaining impaired even following comprehensive external liability restructuring.

Sovereign Quantitative Model (SQM) and Qualitative Scorecard (QS)

Scope’s SQM, which assesses core sovereign credit fundamentals, signals a first indicative credit rating of ‘b+’ for Ukraine. Under Scope’s sovereign methodology, the indicative rating receives: 1) no positive adjustment from the methodological reserve-currency adjustment; and 2) a three-notch negative adjustment from the methodological political-risk quantitative adjustment, considering the presence of war on sovereign territory. On this basis, a final SQM quantitative rating of ‘ccc’ is reviewed by the analyst-driven Qualitative Scorecard (QS) and can be changed by up to three notches up or down depending on the size of qualitative credit strengths or weaknesses of the sovereign compared against those of an SQM-assigned peer group of sovereign states.

Scope identified the following QS relative credit strength of Ukraine: i) monetary policy framework; ii) debt profile and market access; iii) current account resilience; iv) financial sector oversight and governance; and v) financial imbalances. Conversely, the following relative credit weaknesses have been identified under the QS: i) macro-economic stability and sustainability; ii) long-term debt trajectory; iii) environmental factors; iv) social factors; and v) governance factors. On the aggregate, the QS generates no net adjustment for the final indicative credit rating. So, aggregate adjustments signal a long-term issuer credit rating in local currency of CCC for Ukraine.

A final three-notch negative adjustment is applied for Ukraine’s long-term issuer rating in foreign currency by additional considerations, reflecting the settlement of Eurobond debt restructuring. The long-term debt denominated in foreign currency entered selective default after the adoption of a debt moratorium on servicing of Eurobond debt and associated bypassed payment after 1 August 2024 on a retired 2026 Eurobond. This sees a final SD long-term foreign-currency issuer rating for the borrower.

 A rating committee has discussed and confirmed these results.

Environment, social and governance (ESG) factors

Scope explicitly factors in ESG issues in its ratings process vis-à-vis the sovereign-rating methodology’s stand-alone ESG sovereign-risk pillar, which holds a significant 25% weighting under the quantitative model (SQM) and 20% weight under the methodology’s qualitative overlay (QS).

With respect to environmental risks – Ukraine scores poorly under the SQM on carbon emissions per unit of GDP (a proxy variable for “transition costs” in achieving a greener economic model long run) although Ukraine scores comparatively well on greenhouse gas emissions per capita. Ukraine scores near a global median on the degree of exposure and vulnerability to natural-disaster risk – as measured by the ND-GAIN index. The sovereign’s marks are furthermore very strong under the SQM regarding the ecological footprint of consumption compared against the country’s available biocapacity. Under the methodology, environmental objectives and challenges are furthermore considered by the analyst under the QS via an assessment of ‘weak’ for Ukraine on the ‘environmental factors’ QS sub-category compared against the sovereign’s peer group. Ukraine ranked an improved 41^st on the 2024 Environmental Performance Index from 180 countries.⁸ Ukraine plans to cut emissions while growing the economy, reducing poverty and simultaneously combatting 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, thereafter achieving full climate neutrality not later than 2060. However, the war is triggering sizeable, long-lasting environmental damage and an increase of the carbon footprint because of the usage of weapons, contributing to elevating greenhouse gas emissions.

Socially-related credit factors are likewise captured by the SQM and the QS qualitative overlay. Under the SQM, Ukraine receives a middle-of-the-road score on income inequality (as captured by the ratio of the income share of the bottom 50% of the population), moderate marks on labour-force participation, and relatively weak scoring with respect to the old-age dependency ratio. In addition, the comparatively modest GDP per capita as a lower-middle-income economy is captured by the SQM. A long-run decline of the working-age population undermines economic growth potential (estimated at 2.5% a year). Under the assessment of Ukraine’s ‘social factors’ QS analytical category, Scope evaluates this qualitative analytical category as ‘weak’ on balance compared against sovereign peers.

Finally, under governance-related factors captured by the SQM, Ukraine scores under the World Bank’s Worldwide Governance Indicators (WGIs) represent a credit-rating constraint. Nevertheless, between 2015 and 2021, given meaningful institutional reforms, percentile ranks had improved across WGI categories – although scores except on control of corruption declined by 2022 compared against 2021 due to effects of the Russian full-scale invasion. This WGI evaluation includes the three-notch downside adjustment for the SQM indicative rating based on the political-stability WGI category. In a separate assessment of ‘governance factors’ under the QS, Scope evaluates this qualitative analytical category as ‘weak’ against ‘ccc’ indicative sovereign peers of Ukraine.

Rated Eurobond securities downgraded to single-D and withdrawn:

ISIN | Instrument | Coupon | Maturity

XS1303925041 and US903724AR33 | USD 1.34bn 7.75% notes | 7.75% | Sep-26

XS1303925470 and US903724AS16 | USD 1.33bn 7.75% notes | 7.75% | Sep-27

XS2015264778 and XS2015265072 | EUR 1bn 6.75% notes | 6.75% | Jun-28

XS1303926528 and US903724AT98 | USD 1.32bn 7.75% | notes 7.75% | Sep-28

XS1303927179 and US903724AU61 | USD 1.31bn 7.75% | notes 7.75% | Sep-29

XS1902171757 and US903724BV36 | USD 1.6bn 9.75% | notes 9.75% | Nov-30

XS2010028699 and US90372UAR59 | USD 1.75bn 6.876% | notes 6.876% | May-31

XS2010033343 and XS2010033186 | EUR 1.25bn 4.375% notes | 4.375% | Jan-32

XS2010030836 and US903724BY74 | USD 2.6bn 7.253% notes | 7.253% | Mar-35

New Eurobond securities assigned CCC ratings and Stable Outlook:

ISIN  | CUSIP | Instrument

XS2895055981 | 903724BZ4 | Step Up A Notes due 2029

XS2895056013 | 903724CA8 | Step Up A Notes due 2034

XS2895056369 | 903724CB6 | Step Up A Notes due 2035

XS2895056526 | 903724CC4 | Step Up A Notes due 2036

XS2895056872 | 903724CD2 | Step Up B Notes due 2030

XS2895056955 | 903724CE0 | Step Up B Notes due 2034

XS2895057177 | 903724CF7 | Step Up B Notes due 2035

XS2895057334 | 903724CG5 | Step Up B Notes due 2036

Rating committee
The main points discussed by the rating committee were: i) Eurobond debt exchange; ii) ban on payments of additional external commercial claims; iii) restructuring of additional external commercial claims; iv) war and debt-sustainability outlooks; v) future ratings migration; and vi) sovereign peers considerations.

Rating driver references
1. Ukraine, represented by the Minister of Finance of Ukraine: Launch of Exchange Offer and Consent Solicitation (on London Stock Exchange) – 9 August 2024
2. Ukraine, represented by the Minister of Finance of Ukraine: Announcement of the results of the Exchange Offer and Consent Solicitation (on London Stock Exchange) – 28 August 2024
3. Ministry of Finance of Ukraine: Extension of Early Consent Deadline (on London Stock Exchange) – 23 August 2024
4. Ministry of Finance of Ukraine: Ukraine Announces Exchange Offer and Consent Solicitation for Existing Eurobonds – 9 August 2024
5. Government of Ukraine: Statement of the Ministry of Finance on the adopted draft Law which enables the Government to suspend payments under state and state-guaranteed external debt instruments
6. Cabinet of Ministers of Ukraine: Decree from August 27, 2024 No 977: On Amendments to the Resolution of the Cabinet of Ministers of Ukraine dated July 31, 2024 No. 865
7. International Monetary Fund: Ukraine – Fourth Review of the Extended Arrangement under the Extended Fund Facility, Request for Modifications of a Performance Criterion, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for Ukraine
8. Yale University: 2024 Environmental Performance Index

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Sovereign Rating Methodology, 29 January 2024), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and/or Outlooks is (Sovereign Quantitative Model Version 3.0), available in Scope Ratings’ list of models, published under 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 Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit 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 substantially material sources of information were used to prepare the Credit Ratings: public domain and the Rated Entity.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Dennis Shen, Senior Director
Person responsible for approval of the rating: Alvise Lennkh-Yunus, Managing Director
The Credit Ratings/Outlooks were first released by Scope on 28 January 2022. The Ratings/Outlooks were last updated on 15 August 2024.
As a "sovereign rating" (as defined in EU Credit Rating Agency (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 2024: Sovereign, Sub-Sovereign and Supranational Ratings" published on 30 April 2024 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 approval of bond holders of the Exchange Offer and Consent Solicitation of Eurobond debt restructuring. This event has prompted publication of this Credit-Rating action on a date deviating from previously-scheduled release dates per Scope Ratings' sovereign release calendar.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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