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S&P: Ukrainian City of Lviv Lowered To 'SD' On Coupon Default; Raised Back to 'CCC+' After Coupon Paid; Outlook Negative

January 28, 2010 | Standard & Poor's

MOSCOW (Standard & Poor's) Jan. 28, 2010--Standard & Poor's Ratings Services said today that it had lowered its long-term issuer credit and Ukraine national scale ratings on the Ukrainian City of Lviv to 'SD' (selective default) following the city's default on a small coupon payment. We also lowered the senior unsecured debt ratings on the Ukrainian hryvnia (UAH) 92 million bond tranche A due July 20, 2012, and tranche B due Dec. 19, 2012, to 'D'. The city defaulted on the tranche A coupon.

Standard & Poor's then raised the issuer credit and national scale ratings to 'CCC+/uaBB', and the bond ratings back to 'CCC+/uaBB', because the necessary funds due were transferred. The outlook is negative.

"The ratings reflect the very unsupportive and centralized nature of the Ukrainian system of interbudgetary relations," said Standard & Poor's credit analyst Boris Kopeykin.

The central government effectively controls local and regional governments' (LRGs') budget execution as revenues come into and expenditures are made from the LRGs' accounts in the central-government treasury.

On Jan. 19, 2010, Lviv requested that the treasury transfer money to make a coupon payment due on Friday Jan. 22. However, the treasury didn't make the payment on time. Given the two-business-day grace period, the city defaulted on Jan. 26. After the mayor's request to the central government, the treasury transferred the funds to the paying agent, who received them on Jan. 27. According to the city all the bondholders received the coupon payment on Jan. 27.

Based on our understanding, this delay was caused by technical difficulties, and we don't expect such a situation involving interest payments to be repeated in the future with respect to Lviv or any of its rated Ukrainian peers. However, Ukrainian LRGs dependence on the treasury system will likely prevent us from rating any Ukrainian LRG above the sovereign under any circumstances in the future.

The ratings on Lviv continue to reflect those on Ukraine (foreign currency CCC+/Stable/C; local currency B-/Stable/C; Ukraine national scale 'uaBBB'). The ratings also factor in Lviv's low financial flexibility and financial uncertainty arising from its commitment to upgrade its infrastructure to host several of the Union of European Football Associations' (UEFA) championship matches to be held in Ukraine and Poland in 2012 (EURO 2012), which is causing persistent high expenditure needs and has already resulted in some debt accumulation to finance related projects. The country's economic slowdown, with weaker revenue collection, and the city's weak liquidity position also constrain the ratings.

These negatives are offset by Lviv's importance as one of western Ukraine's commercial centers, with a relatively strong and diversified economy in the national context, and ongoing central-government support to the city in expectation of its hosting the EURO 2012.

"The negative outlook reflects the probability that the city's debt policy might be aggressive in 2010-2011, leading to faster debt accumulation to finance the EURO 2012 preparations, and result in higher debt service," said Mr. Kopeykin.

It also reflects the city's dependence on central-government decisions on its revenue and expenditure responsibilities, particularly on transfers, as well as decisions on salaries in the public sector. It also incorporates our assumption of continued expenditure and liquidity pressures in 2010-2011.

We might lower the ratings if the city's liquidity position deteriorates further, either due to weaker revenue collection, or if the city's new borrowings result in large foreign currency risks or excessive debt service over the next 12-36 months. In addition, negative rating actions on Ukraine or continued difficulties with the treasury system could result in negative actions on Lviv.

Company: Lviv

Full company nameLviv City
Country of riskUkraine
Country of registrationUkraine


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