OREANDA-NEWS. Fitch Ratings has affirmed the Ukrainian City of Kharkov's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'CCC' and its Short-term foreign currency IDR at 'C'. Fitch has also affirmed the city's National Long-term rating at 'A+(ukr)'. The Outlook on the National Long-term rating is Negative.

Kharkov's outstanding senior unsecured domestic bond ratings have also been affirmed at 'CCC' and 'A+(ukr)'.

The city's ratings are constrained by the ratings of Ukraine (CCC/C). Fitch assesses the institutional framework governing Ukrainian regions as weak. Notably, it lacks clarity and sophistication, hindering long-term development and budget planning of Ukrainian subnationals. Ukraine's institutional framework has been deteriorating since last year as a result of the political crisis in the country and the military conflict in the east of Ukraine. Some stabilisation is expected following the election of Ukraine's parliament on 26 October 2014 and the formation of a new government by end-2014.

The city faces refinancing of 72% of its debt maturing in December 2014, including UAH99.5m of bonds due on 8 December and a UAH185m bank loan due on 19 December. Fitch expects the city to issue UAH100m of three-year bonds by end-2014 and to extend the maturing bank loan for one year. Positively, Kharkov had large cash reserves of UAH851m as of 1 October 2014, 3x its maturing debt amount, mitigating refinancing risk.

Fitch expects moderate deterioration of the city's budgetary performance following the contraction of the national economy (Ukraine's GRP to decline by 6.5% in 2014) and continuing political risk. Fitch expect the city's operating balance to be around 10% of operating revenue, down from 15.3% in 2013 but nevertheless still a strong performance. Fitch forecast the city will report a low deficit before debt variation at 2%-3% of total revenue in 2014-2016, compared with a surplus of 3.8% in 2013.

Fitch forecasts Kharkov's debt to remain low at around 10% of current revenue in the medium term, supported by its close to balance budgetary performance. In 2013 Kharkov recorded debt at 8% of current revenue and a strong debt coverage ratio (debt/current balance) of less than a year.

The amount of the city's contingent liabilities (UAH401m at end-2013) is comparable to that of its direct debt and may put pressure on the budget, particularly as major public sector entities (PSEs) are loss-making and depend on subsidies to sustain operations. Nonetheless, the contingent liabilities should not jeopardise the city's budget as they currently account for less than 10% of the city's current revenue.

A downgrade of Ukraine's IDRs would lead to a corresponding action on the city's IDRs. A downgrade could also result from a delay in the repayment of the city's maturing debt.

A sovereign upgrade could lead to the same action on the city's ratings provided that the city maintains stable budgetary performance.