December 10, 2012 / 2:33 PM / 5 years ago

TEXT-S&P revises outlooks on Three Ukrainian regions to negative

(The following statement was released by the rating agency)

Dec 10 -

Overview

-- We lowered our long-term sovereign credit rating on Ukraine to ‘B’ from ‘B+', assigned a negative outlook to the long-term rating, and lowered our transfer and convertability assessment on Ukraine on Dec. 7,2012.

-- Under our methodology for local and regional governments (LRGs) and their related sovereigns, we generally cap the ratings on LRGs based on the long-term rating on the related sovereign.

-- We are consequently revising the outlooks on the cities of Ivano-Frankivsk and Dnipropetrovsk and the Autonomous Republic of Crimea to negative from stable and affirming the ratings on all three at ‘B/uaA-'.

-- The negative outlooks reflect that on the sovereign.

Rating Action

On Dec. 10, 2012, Standard & Poor’s Ratings Services revised the outlooks on the Ukrainian cities of Ivano-Frankivsk and Dnipropetrovsk and the Autonomous Republic of Crimea to negative from stable and affirmed the long-term issuer credit ratings at ‘B’ and the Ukraine national scale ratings at ‘uaA-'.

Rationale

This follows our downgrade of Ukraine (B/Negative/B, Ukrainian National Scale ‘uaA-').

In accordance with the methodology we apply to local and regional governments (LRGs) and their related sovereigns, we cap the ratings on Ukrainian LRGs at the same level as the sovereign (see “Methodology: Rating A Regional Or Local Government Higher Than Its Sovereign,” published Sept. 9, 2009, on RatingsDirect on the Global Credit Portal). Under our criteria, an LRG can be rated higher than its sovereign only if we expect it to exhibit characteristics including:

-- The ability to maintain stronger credit characteristics than the sovereign in a stress scenario. This includes, among other factors, lack of dependence on the sovereign for any appreciable share of its revenues, and a more diverse and wealthy economy than the national economy;

-- An institutional framework that limits the risk of negative sovereign intervention; and

-- The ability to mitigate negative sovereign intervention through high financial flexibility and independent treasury management.

At this stage we do not believe that Ivano-Frankivsk, Dnipropetrovsk, and Crimea meet these criteria, so we cannot rate them above the sovereign.

Liquidity

We regard Ivano-Frankivsk’s overall liquidity as “negative,” as defined in our criteria. As of Oct. 1, 2012 the city had Ukrainian hryvnia (UAH)13.3 million (US$1.5 million) in free cash in its general and special fund accounts, which exceeded its direct debt and 12-months debt service. However, the city’s cash position remains volatile.

We assess Dnipropetrovsk’s liquidity as “neutral.” Average cash on accounts comfortably exceeds expected debt service for the next 12 months, which consists of interest payments on a bank loan and a minor midterm treasury loan. As of July 1, 2012, the city had UAH144 million in free cash in its accounts.

We consider Crimea’s liquidity to be “neutral” given the republic’s low debt and lack of principal repayments until 2014, when its UAH133 million bond is due. As of Oct, 1, 2012, unrestricted cash in Crimea’s general and special fund accounts and deposits totaled UAH246 million, exceeding debt service over the subsequent 12 months several fold.

Because the Ukrainian capital market is volatile, we view all LRGs’ access to external liquidity as “uncertain.” The weaknesses of Ukraine’s banking sector are reflected in our Banking Industry Country Risk Assessment (BICRA), which classifies Ukraine in group ‘9’. Our BICRA scores rank risk relating to banking systems on a scale of ‘1’ to ‘10’, with ‘1’ being the lowest risk and ‘10’ being the highest risk (see “BICRA On Ukraine Revised To Group ‘9’ From Group ‘10’,” published on Nov. 9, 2011).

Outlook

The negative outlooks on Ivano-Frankivsk, Dnipropetrovsk, and Crimea reflect that on the sovereign. We might lower the ratings on the three LRGs if we lowered the ratings on Ukraine (B/Negative/B), all other things being equal.

We would revise the outlooks to stable if we revised the outlook on the sovereign to stable.

Related Criteria And Research

-- Long-Term Rating on Ukraine Lowered to ‘B’ On External Financing Needs; Outlook Negative, Dec. 7, 2012

-- Methodology For Rating International Local And Regional Governments, Sept. 20, 2010

-- Methodology: Rating A Regional Or Local Government Higher Than Its Sovereign, Sept. 9, 2009

Ratings List

Ratings Affirmed

Ivano-Frankivsk (City of)

Issuer Credit Rating

Ukrainian National Scale uaA-/--/--

Dnipropetrovsk (City of)

Issuer Credit Rating

Ukrainian National Scale uaA-/--/--

Crimea (Autonomous Republic of)

Issuer Credit Rating

Ukrainian National Scale uaA-/--/--

Ratings Affirmed; CreditWatch/Outlook Action

Ivano-Frankivsk (City of)

To From

Issuer Credit Rating B/Negative/-- B/Stable/--

Dnipropetrovsk (City of)

Issuer Credit Rating B/Negative/-- B/Stable/--

Crimea (Autonomous Republic of)

Issuer Credit Rating B/Negative/-- B/Stable/--

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