Ukraine sovereign rating unchanged in aftermath of railway loan default

Moody's Investors Service stated Wednesday that last week's default by an unrated state-owned company is consistent with the agency's B2 (negative outlook) sovereign credit rating for the government of Ukraine. The company, Ukraine Rail (Ukrzaliznytsia), defaulted on a principal payment on a Barclays Capital-led syndicated loan on November 20 and Moody's is responding to questions that were raised about the possible impact on the sovereign's own rating.

"There is no sovereign guarantee for this loan," noted Moody's analyst Jonathan Schiffer, "and there are no cross-default clauses between this loan and a second Ukrzaliznytsia loan arranged by Deutsche Bank that does contain a government guarantee for $700 mln that would trigger a sovereign default."

Moody's noted that Ukrzaliznytsia is current on payments for the Deutsche Bank loan. The government of Ukraine itself has no major debt payments until March 2010 and a very light foreign currency debt payment schedule for 2010 in comparison to available foreign currency reserves.

In Moody's opinion, the government is again giving clear signals that it does not wish to assume responsibility for outstanding debt of quasi-sovereign corporates and banks. The authorities seem to prefer to conserve foreign currency reserves for the purposes of paying the government's own foreign currency debt. They also may want a cushion against the possibility of any future adverse movements in the exchange rate.

"While there have been defaults by quasi-sovereign corporations such as Ukrzaliznytsia and Naftogaz, to date the sovereign has not shown any weakening in its intention to pay its own debts," said Schiffer.

Nevertheless, Moody's noted that Ukraine's B2 rating incorporates weak macroeconomic fundamentals, a banking system that remains under strain, and distinctly poor coordination between fiscal and monetary policies. While some of these problems may well reflect political in-fighting in the run-up to the Presidential election in January-February 2010, the fiscal loosening inherent in recent legislation -- which may raise the budget deficit by up to 7% of GDP in 2010 -- is a serious concern. Hence, the negative outlook on the B2 sovereign rating remains in place.

November 25, 2009 -

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