S&P cuts Ukraine rating to 'selective' default as restructuring looms

S&P cuts Ukraine rating to 'selective' default as restructuring looms

By Marc Jones

S&P Global cut Ukraine's credit rating to 'selective' default on Friday, after the war-torn country missed an international bond payment this week as it puts the finishing touches on major debt restructuring.

While the $34 million payment is still in its 'grace period', S&P said there was little chance it would be made considering Ukraine's President Volodymyr Zelenskiy has now signed a law allowing debt payments to stop while it completes its restructuring.

"We do not expect the payment within the bond's contractual grace period of 10 business days," the ratings agency said, adding that the country's bonds would drop to 'D' for full-scale default once the restructuring takes place.

It isn't expected to last long though.

"Upon the foreign currency commercial debt restructuring taking effect, we could consider the default as cured and raise the rating," S&P said.

"We tend to rate most sovereigns emerging from default in the 'CCC' or 'B' categories depending on post-default credit factors, including the new terms of government debt."

Before Russia's 2022 invasion S&P had a B rating for Ukraine.

The costs of the war though have seen Kyiv's debt-to-GDP ratio balloon from around 60% to well over 80%. The International Monetary Fund predicts it would have almost reached 100% next year without a restructuring. It wants the rework to help get it to 82% by 2028.

The restructuring though will impact only its international bonds, which account for just under $22 billion - less than 15% - of an overall debt load of more than $140 billion.

S&P's downgrade didn't include Ukraine's CCC+ 'local-currency' debt rating which cover its sizable stack of hryvnia-denominated bonds as opposed to its dollar-denominated ones.

Hryvnia-denominated debt is primarily held by Ukraine's central bank and its domestic banks, half of which are state-owned.

A default on those obligations would "amplify banking sector distress" S&P warned, increasing the likelihood that the government has to pump money into the banks, thereby "limiting the benefits of debt relief".