Rating action

Scope Ratings GmbH (Scope) has today affirmed Ukraine’s Eurobond instrument ratings at CCC and revised the Outlook to Negative from Stable. Scope debt-instrument ratings are evaluated based on the expected loss given default*.

Ukraine’s long-term issuer and senior unsecured debt-category ratings in foreign currency are unchanged at selective default (SD) with no Outlooks assigned on ratings in default grade.

No action is taken on the long-term issuer and senior-unsecured debt ratings in local currency at CCC, and Outlooks are Stable. Scope additionally takes no action on the short-term issuer ratings in both local- and foreign-currency rated S-4, and associated Stable Outlooks are unchanged. Scope also takes no action on long-term domestic debt instruments in local- and foreign-currency rated CCC – and Stable Outlooks are unchanged.

The affirmation of Ukraine’s CCC ratings on Eurobond securities and the revision of the Outlook to Negative represent updated assumptions on the timing of any additional restructuring of Eurobonds after the commitment from the Ukrainian authorities for second-stage restructuring only if required.

Download the rating report.

Key rating drivers

The commitment from authorities to second-stage restructuring of Eurobonds only if needed.

In August 2024¹, Ukraine restructured 13 Eurobonds alongside a sovereign-guaranteed Eurobond issued by roads-operator Ukravtodor. The restructuring was approved by more than 97.38% of the holders of aggregate principal of retired securities and resulted in a 35.75% effective write-off alongside the contingent further curtailment to as low as 23.75% should Ukrainian nominal GDP out-perform. The net-present-value haircut was approximately 50% excluding contingent added principal on the new Bond B. This agreement reduced USD 8.67bn of claims and enables Ukraine to save USD 22.75bn on debt payments by 2033.

In its 30 August 2024 rating announcement, Scope referenced that, even after the August-2024 Eurobond restructuring, the new Eurobond securities post-exchange remain sub-ordinated and additional restructuring of the securities remains feasible under any scenario of extended conflict. Under the updated debt-restructuring strategy of the IMF and government of Ukraine since, the government committed to such restructuring of the instruments only if required².
 
The definitive restructuring is expected to occur by the penultimate review of the IMF Extended Fund Facility (EFF) – e.g., by around the second half of 2026, or when current exceptionally-high uncertainty subsides. Ukraine retains advisors and continues sharing information on potential timelines and outcomes.

The legacy bilateral official debt extended by select G-7 creditors to the sovereign – currently having payments on standstill until 2027 – is furthermore seen being renegotiated by the final review of the EFF or the conclusion of exceptionally-high uncertainty associated with the war. An official export credit agency has reached out to authorities, requesting a treatment in line with the approach being taken on other bilateral claims.

Ukraine’s long-term issuer rating in foreign currency remains in selective default as restructuring talks continue around the additional external claims. The long-term issuer rating in foreign currency entered selective default on 15 August 2024 after the entry into force of the moratorium on Eurobond debt service.

On 27 August 2024³, Ukraine amended this external debt-servicing moratorium law announcing a payment moratorium for additional perimeter claims: specifically, the payment suspension for external commercial loans from American-corporate Cargill from 3 September 2024; on Ukrenergo sustainability-linked notes starting 9 November 2024; and specific warrant derivatives beginning 31 May 2025.

Ukraine is continuing debt-restructuring negotiations with creditors regarding the additional claims. The loans from Cargill amounted to a modest USD 0.7bn ahead of the restructuring talks (0.4% of GDP); the Ukrenergo notes amounted to USD 0.825bn (0.5% of GDP). The warrant securities being the most consequential from a debt-service angle.

The long-term debt-sustainability outlook remains challenging even following Eurobond restructuring, as long as the war continues. There has been an improvement of the long-run debt-sustainability outlook after the Eurobond debt exchange. Nevertheless, debt sustainability remains challenging.

After the restructuring, debt-to-GDP is estimated to have risen to around 88.0% of GDP by end-2024, from 84.4% of GDP at the end of 2023 and 49.0% as of 2021 before the escalation of the war. Debt is seen remaining above 90% of GDP over the coming years. The IMF has recently revised its debt projections after the August Eurobond restructuring and figures are today less optimistic – assuming the war winds down by end-2025 compared to the Fund’s earlier assumptions of by end-2024. Under the downside scenario, the IMF assumes the war ends mid-2026.

The challenges for the post-restructuring ratings of the external commercial debt remain significant. Most of Ukraine’s debt service are linked to domestic debt, which is not subject to re-profiling so long as the war continues under an intense phase. The majority of remaining debt service and around half of the aggregate principal of Ukrainian debt is linked to multi-lateral loans, where multi-lateral institutions do not participate under debt relief. Resultantly, the less than 10% of Ukrainian total debt that is the Eurobond securities remains sub-ordinated, and the risk of second-stage restructuring hinges on the outlook for meeting IMF programme targets of public and publicly-guaranteed debt of 82% of GDP by 2028 and 65% by 2033.

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

Rating-change drivers

There is no Outlook assigned on the long-term issuer rating in foreign currency in selective default.

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 Negative Outlook on Eurobond securities represents the risk of a second-stage restructuring within the scope of the IMF programme to 2027.

The downside scenario for the Eurobond ratings is if the restructuring of Eurobond securities rises in likelihood, nears in timing and/or sees the likelihood of higher-than-assumed losses.

The upside scenario for the Eurobond rating Outlook is if the debt-sustainability outlook in the future reduces the case for second-stage restructuring of the securities.

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

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

1. The likelihood of re-profiling of the domestic debt increases, such as under a scenario of the debt-sustainability outlook remaining impaired even after comprehensive external liability restructuring.

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

1. The government’s debt-sustainability outlook meaningfully improves; and/or
    
2. Security risks are significantly reduced.

Sovereign and 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 model reserve-currency adjustment; but 2) a three-notch negative adjustment from the model political-risk adjustment, considering the presence of war on sovereign territory. On such bases, the final SQM quantitative rating of ‘ccc’ is assigned.

The ‘ccc’ final model rating is next 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 sovereigns.

Scope identified the following QS analytical categories as relative credit strengths of Ukraine against the relevant sovereign peers: i) ‘monetary policy framework’; ii) ‘debt profile and market access’; iii) ‘current account resilience’; iv) ‘resilience to short-term external shocks’; v) ‘financial sector oversight and governance’; and vi) ‘financial imbalances’. Conversely, the following QS analytical categories have been identified by the primary analyst as relative credit weaknesses against peers: i) ‘macro-economic stability & sustainability’; ii) fiscal policy framework; iii) ‘long-term debt trajectory’; iv) ‘environmental factors’; v) ‘social factors’; and vi) ‘governance factors’. On aggregate, the QS generates no net adjustment. As such, aggregate scorecards signal a long-term issuer credit rating in domestic currency of CCC.

A final three-notch negative adjustment is applied to Ukraine’s long-term issuer rating in foreign currency by additional considerations, reflecting the ongoing restructuring of: i) external commercial loans to the sovereign from the US-corporate Cargill; ii) sovereign-guaranteed dollar-denominated green notes of the state-owned electricity transmission company Ukrenergo; and iii) the sovereign GDP warrants. The adjustment furthermore considers the selective default on long-term debt in foreign currency after the entry into force of debt moratoria on the specified additional sovereign perimeter claims. This sees final long-term issuer and senior unsecured debt ratings of the borrower in foreign currency of SD.

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, holding 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 its greenhouse gas emissions per capita. Ukraine scores near the global median on its degree of exposure and vulnerability to natural-disaster risks – as measured by the ND-GAIN Index. The sovereign’s marks are furthermore strong under the model regarding the ecological footprint of consumption compared against the nation’s available biocapacity. Under Scope’s methodology, environmental objectives and challenges are furthermore considered by the analyst under the Qualitative Scorecard via an assessment of ‘weak’ for Ukraine on the ‘environmental factors’ analytical sub-category compared against the sovereign peer group. Ukraine ranked an improved 41^st on the 2024 Environmental Performance Index of 180 nations.⁴ Ukraine plans to cut emissions while growing the economy, reducing poverty and simultaneously combatting aggression from neighbouring Russia – aiming to reduce 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. Nevertheless, the war is triggering sizeable, long-lasting environmental damages and an increase of the carbon footprint because of the use of weapons, contributing to boosting greenhouse gas emissions.

Socially-related credit factors are likewise captured by the SQM and by the qualitative overlay. Under the SQM, Ukraine receives a middle-of-the-road score on income inequalities (as captured by the income share of the bottom 50% of the population), moderate marks on the 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 trend growth (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’ compared against SQM-assigned peers of the sovereign.

Finally, under governance-related factors captured by the SQM, Ukraine’s scoring under the World Bank’s Worldwide Governance Indicators (WGIs) represents a credit-rating constraint. Nevertheless, between 2015 and 2021, given meaningful institutional reforms, percentile ranks of Ukraine had improved across the WGI categories. Scoring for the political-stability WGI category declined after 2021 due to the effects of the full-scale war with Russia. The political-stability WGI evaluation underscores currently a three-notch downside adjustment underlying the final model rating. In the separate assessment of the ‘governance factors’ analytical category of the QS, Scope evaluates this qualitative analytical category as ‘weak’ against ‘ccc’ indicative sovereign peers.

Eurobond securities affirmed at CCC with the Outlook revised to Negative:

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) the second-stage restructuring; ii) the IMF programme; iii) restructuring of additional perimeter claims; iv) the war and debt-sustainability outlooks; and v) sovereign peers considerations.

Rating driver references
1. 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
2. International Monetary Fund: Ukraine – Sixth Review Under the Extended Arrangement Under the Extended Fund Facility, Requests for Modification of a Performance Criterion, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for Ukraine
3. 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
4. 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 4.0), 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 Credit Ratings: Giacomo Barisone, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 28 January 2022. The Ratings/Outlooks were last updated on 30 August 2024.

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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