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RA Fitch Downgrades Ukraine's DTEK to 'RD'

March 11, 2016 | Cbonds

10 March 2016: Default Rating (IDR) to 'RD' (Restricted Default) from 'C', as Fitch understands from management that the company is in the payment default under several bank loans due to uncured expiry of the grace period on some bank debt. A full list of rating actions is provided at the end of this commentary.

Under Fitch's criteria, the uncured expiry of any applicable grace period, cure period or default forbearance period following a payment default on a bank loan, capital markets security or other material financial obligation indicates 'RD' ratings.

KEY RATING DRIVERS

Payment Default under Bank Loans
Fitch understands from the company that the grace period under most of DTEK's bank loan instalments with a total principal amount of UAH14.3bn (USD528m) due in end-February 2016 has passed. DTEK failed to make principal payments due in end-February 2016, with some banks lenders subsequently issuing the company with a reservation of rights letter. Fitch notes that the default on final bank loan maturities is quite close to the USD50m threshold under Eurobond cross-default clause, and we expect it might be breached in the coming months.

The rating downgrade to 'RD' reflects Fitch's opinion, that an issuer has experienced an uncured payment default on a loan or other material financial obligation but which has not entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, and which has not otherwise ceased operating.

Further Debt Restructuring Expected
The company's cash position of UAH937m (USD37m) at 1 February 2016 was well below its short-term maturities of UAH25bn (USD997m) due in 2016. DTEK intends to negotiate a rescheduling of bank loans maturities and its Eurobonds within several months.

Foreign Currency Exposure
DTEK continues to be exposed to high foreign currency fluctuations risk, as most of its debt is denominated in foreign currencies, i.e. US dollar (58.2% of total debt at end-2015), euro (19%), rouble (17.6%). This contrasts with 6% of its revenue in US dollar in 2015, while most of its remaining revenue is denominated in hryvna. An increase of economic and political uncertainty in Ukraine has led to significant hryvna devaluation against major currencies. The company does not fully hedge its FX risks.

High Exposure to Local Banks
DTEK's liquidity position is weakened by a high exposure to domestic banks (40% of cash and cash equivalents as of February 2016). In addition, a significant portion of cash is kept at First Ukrainian International Bank, which is owned by SCM, DTEK's parent company.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for DTEK include:
- Domestic GDP decline of 11.6% in 2015 before recovering to 1% growth in 2016, and inflation of 48% in 2015 and 17% in 2016
- USD/UAH exchange rate at 25 in 2016
- Deterioration of cash collection rates
- Electricity consumption to decline faster than GDP contraction
- Debt split by FX in line with 2015 breakdown
- Capital expenditure at maintenance level of UAH3.5bn over the next three to five years
- No dividends payments

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- DTEK entering into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure.

Positive: Following a possible financial restructuring and once sufficient information is available, the 'RD' rating will be revised to reflect the appropriate IDR for the issuer's post-restructuring capital structure, risk profile and prospects in accordance with relevant criteria.

FULL LIST OF RATING ACTIONS
DTEK Energy B.V.
Long-term foreign and local currency IDRs: downgraded to 'RD' from 'C'
Short-term foreign and local currency IDRs: downgraded to 'RD' from 'C'
National Long-term rating: downgraded to 'RD(ukr)' from 'C(ukr)'
Foreign currency senior unsecured rating: affirmed at 'C'; Recovery Rating revised to 'RR6' from 'RR5'
National senior unsecured rating of 'C(ukr)' affirmed and simultaneously withdrawn. The rating has been withdrawn as it is no longer considered by Fitch to be relevant to the agency's coverage. As some debt instruments are subject to 'RD' while some other debt instruments may be performing, the generic National senior unsecured rating is no longer applicable.

DTEK Finance plc
Foreign currency senior unsecured ratings including USD750m and USD160m bonds: affirmed at 'C'; Recovery Rating revised to 'RR6' from 'RR5'

Company: Ukraine

Full company nameUkraine
Country of riskUkraine

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