Ukraine is heading towards default, according to the Fitch Ratings agency, Ukraine Business News reported on January 23.

The agency rated Ukraine's Long-Term Foreign-Currency IDR at 'CC', claiming that a further foreign currency commercial debt restructuring is probable, given the massive economic damage from Russia’s full-scale invasion and resulting large financial requirements in the medium term. Fitch sees that a degree of burden sharing by commercial creditors is a likely condition of the large financial assistance extended by official international creditors, the company stated in a report.

Ukraine deferred Eurobond payments in August for 24-months, saving the war-torn country $6bn; however, medium-term debt sustainability risks were left unresolved. Fitch notes that external debt service costs will rise to $5.4bn in 2024 and $7bn in 2025. This does not include $3.5bn in deferred Eurobond interest payments, which could be capitalised.

“While the timing of any such restructuring remains uncertain, there will be greater impetus for negotiations if the security outlook improves, and as the expiration of the Eurobond standstill draws closer,” Fitch stated.

Fitch affirmed Ukraine’s local currency IDRs at CCC-, reflecting the greater disincentives to include local-currency debt in any further debt restructuring. Only 5% is held by non-resident institutions, with 55% held by the National Bank of Ukraine (NBU) and 32% by the domestic banking sector, of which half are state-owned.

“We also do not anticipate strong international pressure to restructure domestic debt, partly due to additional concerns that this could undermine efforts to revive demand for new government debt issuance,” Fitch stated.

The company expects the war to drag deep into 2023. However, with neither side showing a decisive military superiority, Fitch believes the prospect of a negotiated settlement will become more likely over a longer period. This could take the form of a “frozen conflict” rather than sustainable peace, the agency noted.

Fears that Ukraine would default arose in July 2022, when one of the country's largest state-owned companies, Naftogaz, asked bondholders for a two-year payment freeze on $1.4bn of its bonds. This was followed by the State Automobile Roads Agency (Ukravtodor) and power company Ukrenergo asking to defer bond payments for two years.

As a result, rating agencies downgraded several state companies, including Naftogaz, Ukrenergo and Ferrexpo. The most recent company to suffer is Ukrainian Railways (UZ), which asked its Eurobond owners to postpone all payments, due in 2024 and 2026, for 24 months.

Ukraine is going to need around $750bn for reconstruction, Larry Fink, CEO of BlackRock said at the World Economic Forum in Davos last week. 

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