Why investors count on individual companies more than on Ukraine

Author : Olena Holubeva

Source : 112 Ukraine

Despite statements of the Ukrainian authorities regarding the improvement of the country’s business climate, the attitude of the investors towards Ukraine is reflected in the low international ratings and plummeting investments flows
18:19, 18 April 2019

Open source

Despite statements of the Ukrainian authorities regarding the improvement of the country’s business climate, the attitude of the investors towards Ukraine is reflected in the low international ratings and plummeting investments flows. According to numerous admittible agencies, ratings of some individual companies are higher than the country’s ratings itself, which allows them to make profitable borrowings in the foreign markets. For example, Fitch Ratings has raised the long-term issuer default rating of the Metinvest mining and smelting group (major shareholder of Metinvest Group is SCM Holdings, controlled by Ukrainian oligarch Rinat Akhmetov, - ed.) from B to B +, although for several years Ukraine’s general rating has been maintained at B- level. This is an extraordinary observable fact, taking into account the accuracy of the international rating agencies, experts say.

Related: Key Yanukovych’s ex-sponsor Akhmetov bets on Poroshenko during 2019 elections

According to the Fitch rating agency, for several years, Ukraine’s long-term credit rating has been maintained at the B- level. At the same time, in November 2015 – November 2016, Ukraine rating was even lower – CCC rating with substantial risks. Country’s low rating is one of the main reasons that, amid reports of improvements in the business climate in Ukraine, causes lowering investment, experts assure. “According to the forecast, this year the inflow of foreign investments will amount to 1.5 billion USD compared to last year’s 1.7 billion USD. For example, in 2013, which was rather repellent in terms of attracting investment a year, 4.5 billion dollars of foreign investment came to Ukraine,” Oleh Ustenko, executive director of the Bleizer International Foundation, notes.

The ratings of the world’s largest agencies like Fitch, Moody’s, Standard & Poors are the most prestigious ones. They give the investors confidence that the higher the credit rating of those instruments of the eminent, the lower the risks of an investor. Non-professional investors, who cannot evaluate the company or obtain in-depth information to make an assessment of the issuer's reliability, pay attention to these ratings.

Related: Cooperation with IMF is factor of Ukraine's creditworthiness, - Fitch

However, not all companies can afford the assessment of an international rating agency. In particular, the ratings of international agencies were assigned to Eurobonds of such companies as DTEK (the holding company that develops business streams in the energy sector, owned by Rinat Akhmetov, - ed.), Metinvest, and large banks that entered the foreign borrowing market (Ukreximbank, Oschadbank).

The rating not only allows to assess the degree of confidence but also to compare the quality of its investment climate with other countries. The investor compares the risks and the level of profitability on invested capital. The higher the risk level, the higher the return should be received by the investor. From this point of view, any investor looks at the country’s rate first, and only after that examines individual sectors and companies. This is why these three largest rating agencies, as a rule, never assign an individual company rating higher than in the whole country.

Related: Fitch Agency confirms Ukraine's B- rank with stable prediction

Taking this into account, Ukraine is one of the few countries, where ratings to individual companies are higher than the country’s ratings as a whole. For example, Fitch Ratings has published a long-term issuer default rating (IDR) of the Metinvest, Ukrainian mining and metals group, (Metinvest BV) in national and foreign currency and its Eurobonds – it has changed from B to B + with a constant rated recovery RR4. The fact that the rating of Metinvest is above Ukraine’s overall position (B-) could be explained by a steady improvement in the ratio of hard currency to the foreign debt service. In addition, the rating upgrade reflects the improved capital structure of Metinvest, a smoother redemption profile, group’s obligations in prioritizing capital expenditures, debt repayment and working capital financing over dividends, the international agency said.

In 2018, Metinvest’s deal to refinance its debt ($ 2.271 billion) was recognized as the deal of the year among issuers in Europe, the Middle East, and Africa, according to the IFR magazine, whose awards are considered the most prestigious in the global financial community. Metinvest was forced to begin negotiations on debt restructuring in early 2015, in mid-2014 the group got into the “perfect storm.” The prices of steel and iron ore at that period of time fell to the lowest level in the last 10 years. The armed conflict in eastern Ukraine led to a decrease in production, as well as a significant reduction in the limits of Western banks to finance Ukrainian borrowers. Due to these reasons, the group was unable to service its debt portfolio under the conditions and was forced to start restructuring negotiations.

Related: How can Ukraine untangle it from IMF's net

Despite the success of individual companies, the overall situation in the country requires significant changes, experts emphasize. Ukraine’s low ratings are one of the reasons why Ukrainian, even progressive companies get so little investment. After all, the rating reflects, in particular, a country’s quality-derived business climate. American Chamber of Commerce reports that by the level of corruption, our country has already slipped to the pre-Maidan level, and the optimism regarding large-scale improvements in large business diminished.

Speaking about the Ukrainian rating, the circle of potential lenders is hundreds of times smaller than for countries with a rating of Russia’s or Kazakhstan’s level, and hundreds of thousands of times smaller than for the Western countries. That is why Russian or Kazakh issuers can afford international loans at a rate of 3-5%, while our borrowers hardly get loans at the rate of 9%.

Among other things, in 2019, substantial payments on the sovereign debt are expected. Taking into consideration Ukraine’s high debt burden, the IMF program is currently the only resource for the country’s economic survival.

Related: IMF to lower forecast of world economic growth in 2019, 2020, - Lagarde

The agencies are not optimistic about the ongoing conflict in Donbas, which, according to Fitch, continues to bear risks for the countryєs overall macroeconomic activity and stability. Ukraine loses not because we do not have interesting business projects, but because the country as a whole has a high level of risk and investors understand this.

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