“Although negotiations over the specific details of the restructuring are only now getting underway, Moody's believes that the likelihood of a distressed exchange, and hence a default on government debt taking place, is virtually one hundred percent,” Moody’s said in a news release Tuesday.
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Another reason for downgrading Ukraine’s rating is that foreign private lenders are expected to incur substantial losses due to the government's plan of restructuring the bonds it has issued or guaranteed, the agency said.
In the future the recovery of their value will depend on the terms of the debt exchange that is now being discussed with creditors. The terms could include a grace period on principal repayments during the term of the IMF program, and a reduction in the existing bonds' current coupons, which average 7.1 percent.
The negative outlook reflects the agency’s expectation that the level of Ukrainian external debt will remain very high, despite plans to restructure the debt and carry out reforms.
The Ukrainian authorities are trying to agree a restructuring plan for the country’s $15.3 billion debt with international lenders over the next four years.
Moody's leaves open the possibility of downgrading Ukraine another step lower if the bondholders suffer greater losses than the Ca level permits, or if the default spreads to other of country’s obligations.
READ MORE: Ukraine moves step closer to default - Fitch
At the same time, the outlook could become stable should the geopolitical and financial situation in Ukraine improve.
Apart from downgrading Ukraine’s issuer rating the agency also lowered the country ceiling for long-term foreign currency debt to Caa3 from Caa2, and its country ceiling for long-term domestic currency debt and deposits to Caa2 from Caa1 – all highly speculative with little prospect for recovery.
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