OREANDA-NEWS. Fitch Ratings has downgraded Ukraine-based DTEK Holdings B.V. (DTEK)'s Long-term local currency Issuer Default Rating (IDR) to 'CCC' from 'B-' and affirmed its Long-term foreign currency IDR at 'CCC'.

The downgrade of DTEK's Long-term local currency IDR reflects Fitch's view that its standalone rating is no longer constrained by the Country Ceiling and is commensurate with 'CCC'. This is due to the company's exposure to political and economic instability and uncertainty, which is likely to adversely affect its credit metrics, potential refinancing risk and high FX risk.

Political developments in Ukraine have been quite unstable in 2014, as the Crimea region is under control of the Russian Federation and the Donetsk and Lugansk regions are in military conflict. This adds to political and economic uncertainty with Fitch forecasting a 5% decline in Ukraine's GDP for 2014. Disruption of DTEK's operations in these areas and/or a significant drop in collection of accounts receivables are likely to have a material adverse impact on its credit metrics. Although assets located in Donetsk and Lugansk regions account for a significant part of DTEK's EBITDA and revenue, the company assesses exposure to the conflict area as much smaller. DTEK's exposure to Crimea is limited as its electricity distribution in Crimea accounted for less than 3% of revenue and around 1.5% of EBITDA in 2013.

Fitch views DTEK's liquidity position as relatively weak and its upcoming maturities as onerous, which increases refinancing risk. Its ability to repay and/or refinance short-term maturities is largely dependent on the accessibility of cash mainly held at 'CCC' rated Ukrainian banks and the availability of bank funding. The company's peak repayments of USD1.2bn fall due in 2014-2015 (USD0.3bn due in 2014 and USD0.9bn in 2015) and include the remaining USD200m portion of its USD500m eurobond due in 2015. While the company had gross cash & cash equivalents of UAH4.9bn (USD595m) at end-2013 and access to credit lines, Fitch believe that a drawdown of the credit lines may prove to be difficult in the current political and economic environment.

The Ukrainian power sector remains heavily regulated, which is also a constraint for DTEK. While the government plans to gradually liberalise the sectors in which DTEK is involved, this might be postponed as a result of the current instability in Ukraine.

DTEK's ratings are supported by its leadership in coal mining, power and heat generation, electricity distribution and sales among Ukraine's utility companies. With installed electric capacity of over 18 gigawatts at end-2013, DTEK ranks among the largest Fitch-rated CIS power utilities. Fitch believes that DTEK will continue to occupy the leading position among private Ukrainian utility companies for at least the medium term. Its vertical integration in coal mining, power generation and distribution supports its profitability.

RATING SENSITIVITIES
Negative: Future developments that could lead to negative rating action include:
- Further deterioration of the liquidity position resulting in the company's inability to service its debt
- Breach of the EBITDA-based 3x leverage financial covenant
- Further hryvna devaluation, disruption of the company's operations and/or a drop in accounts receivables collection resulting in material weakening of DTEK's credit metrics

Positive: Future developments that could lead to positive rating action include:
- Improvement of the macro-economic environment along with improvement of the company's liquidity position and accounts receivables management.