Ukrainian Railway confirms intention to issue new Eurobond

Ukrainian Railway (RAILUA) has the potential to
increase its debt by USD 1 bln, indicating a possible Eurobond issue, according
to its Feb. 15 press release citing CEO Yevhen Kravtsov. With the company’s
gross debt of UAH 34.2 bln as of August 2018, its net debt-to-EBITDA ratio was
at 1.5x, Kravtsov said. The company has a leverage covenant of 3.0x, based on
its agreements with the EBRD and EIB. “That means that with EBITDA at the
current level, we are capable of increasing our debt level by UAH 25 to 30
bln,” he said.

He also confirmed that Ukrainian Railway is now
considering a Eurobond issue, on which he can further comment as soon as the
government publishes a respective resolution (on its parameters). Kravtsov also
highlighted that it’s important for investors to have a clear understanding on
how the borrowing will be serviced. Taking this into account, Ukrainian Railway
has proposed a mechanism of automatic adjustment of freight railway rates based
on Ukraine’s producer price index.

Recall last week, the Ukrainian media reported the
Cabinet approved on Feb. 13 a resolution allowing Ukrainian Railway to issue a
new Eurobond. At the same time, Ukrainian Railway commented that the exact
parameters of that issue (including interest rate) have yet to be confirmed.

Recall, Ukrainian Railway’s existing USD 500 mln
Eurobond will be amortized by USD 150 mln both in March and September 2019 and
then by USD 50 mln semi-annually between March 2020 and September 2021.

Alexander Paraschiy: Attracting
new debt is important for the company to smoothly implement its ambitious UAH
24.5 bln CapEx program for 2019 and simultaneously service its debt. In case
the company fails to attract new large debt, it will have to cut its CapEx
program – but we are sure it will continue to service its debt smoothly.
Fortunately for Ukrainian Railway, with the introduction of a new regulation on
foreign currency this month, the National Bank has removed an 11% interest rate
cap for Ukrainian borrowers on the international markets. That raises the
chance that Ukrainian Railway, whose current Eurobond trades at nearly a 11%
yield, will be able to place a new bond.

The adoption of automatic freight rates hikes would
improve the attractiveness of Ukrainian Railway’s Eurobonds by securing a clear
revenue growth path. But so far it is hard to say whether the government will
dare to implement that, especially considering the strength of the lobby of the
company’s key industrial clients, who oppose such changes.