S&P upgrades Ukrainian Railways rating to sovereign

S&P Global Ratings upgraded the credit rating of
Ukrainian Railways (RAILUA) to B- from CCC+ with a Stable outlook, according to
the agency’s Aug. 2 report. The key event triggering the upgrade was the
successful placement of a USD 500 mln Eurobond,
which “removes pressure on liquidity,” S&P concluded. Namely, the raised
money will allow the company to smoothly pay amortization on an old Eurobond
over the next 12 months (USD 150 mln in September 2019 and USD 50 mln in March
2020).

Also, the agency expects the company will be able to
generate enough cash to repay a Sberbank loan of UAH 6.4 bln (or about USD 240
mln) maturing in July 2020. S&P also highlighted that existing
unrestructured debt for USD 153 mln does not affect the company’s solvency as
this debt won’t trigger cross-default on the rest of the debt.

S&P expects Ukrainian Railways will achieve
2019-2020 operating results at least in line with the level of 2018 (when
EBITDA amounted to UAH 16.2 bln) and its CapEx in these years won’t exceed UAH
13 bln.

The credit agency could downgrade Ukrainian Railways’
rating in case its liquidity worsens (e.g. if existing credit lines become
unavailable, or if the firm increases its expenditures) or if S&P concludes
the company won’t be able to accumulate enough liquidity to smoothly repay its
Sberbank loan next year. The only possible short-term trigger for the company’s
rating increase is an upgrade of Ukraine’s sovereign rating, S&P wrote.

Alexander Paraschiy: With this
move, Ukrainian Railways’ S&P rating is equal to Fitch’s rating and the
sovereign level. The move looks logical given that Ukrainian Railways indeed
has addressed its key liquidity issue with the recent Eurobond placement. The
proceeds from the Eurobond will be only enough to service the nearest payments
on the old Eurobond (including repayment of the short-term loans the company
took to pay USD 150 mln in amortization on the bond in March 2019).

So to secure the smooth repayment of Sberbank loans,
the company will have to accumulate funds or seek refinancing. So far, both
options look possible. Therefore, we do not see any risk for Ukrainian
Railways’ solvency unless market conditions deteriorate for the company.

We are keeping our neutral view on RAILUA Eurobonds.