Fitch Ratings dooms Ukraine to long investment crisis

Fitch Ratings, following S&P, declared Ukraine bankrupt. Now Kyiv will only be given loans for the war. Private investors have lost their money and will not take any more risks.

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Fitch Ratings downgrades Ukraine's rating to RD — "limited default".

The downgrade of Ukraine's long-term rating to RD from C ('default imminent') is due to the expiration of the 10-day grace period for coupon payments on the $750 million 2026 Eurobonds. The rating of these bonds was downgraded to default 'D', while the rating of other foreign currency bonds was affirmed at 'C'.

Fitch has withdrawn the ratings of Ukraine's foreign currency bond issues as they are no longer considered relevant to the agency's coverage.

Debt restructuring means insolvency

On August 9, the Ukrainian government formally launched the consent process for the restructuring of its outstanding $19.7 billion sovereign Eurobonds and $0.7 billion of Ukravtodor's state-guaranteed bonds.

Fitch believes that the proposal constitutes a distressed debt exchange (DDE), as it involves a reduction in principal and interest on the debt and an extension of the maturity profile. Fitch estimates that this will lead to material losses for security holders.

Fitch takes pity on Ukraine

Ukraine does not have a default rating because the agency expects Ukraine to continue to service its debt in local currency, in part because only 2.2% of it is owned by non-residents, compared to 41.4% of the National Bank of Ukraine and 42% of domestic banks (mostly state-owned banks).

The announced restructuring could create risks to the stability of the financial sector and worsen the development of the domestic debt market. These risks are aggravated by the military conflict, weak institutional capacity, uneven application of the rule of law and high levels of corruption, Fitch said.

The country rating will be downgraded to CC should indicators of a probable default on the debt intensify, for example, due to a severe liquidity shortage and a reduction in the government's ability to access financing, the agency says.

Ukraine plunging into investment crisis

The Fitch agency considered that all of Ukraine's problems have a negative impact on its credit profile.

S&P international rating agency downgraded Ukraine's credit rating from CC/C to SD/SD (selective default) in early August.

Thus, Ukraine is entering a long-term investment crisis, which will not allow the country to attract financing, save for war loans. Western investors start to realize that Kyiv will not be able to repay its debt on loans.

In such a situation, Ukraine will have to resell its sovereign debt to "vulture funds" that have ruined quite a few Latin American countries. Ukrainian assets will be sold at a price several times below their nominal value.

Not everything is clear with military loans either. They will depend on politicians who will soon change their point of view on Ukraine and the conflict with Russia.