Ukrzaliznytsia signs diesel locomotive deal with GE

Ukrainian Railway (Ukrzaliznytsia, RAILUA) signed a
partnership agreement with General Electric (GE US) on the purchase and
modernization of diesel locomotives, the company reported on Feb. 23. The deal
foresees the purchase of up to 225 new locomotives and modernization of up to
75 old locomotives in 15 years, at about a USD 1 bln total value. The first
batch of 30 new U.S.-made locomotives will arrive in 4Q18 and 1Q19, the company
clarified. The share of Ukrainian added value in the first batch will be 10%,
while it will reach 40% in the future.

The value of the first batch is about USD 140 mln, or
about USD 4.5 mln per locomotive, according to the biz.liga.net news site. The
deal will be financed by Ukreximbank (in the form of financial leasing) with
the guarantees of Citi Bank, the news site said. Similar locomotives (GE
Evolution ТЭ33А) are operational in Kazakhstan, where over 300 units have been
built so far.

The current fleet of Ukrzaliznytsia mainline diesel
locomotives is 609 units, with their average age of 31 years v.s. normative
lifespan of 20 years, the company reported (only 11 units are aged less than 16
years, we estimate).

Alexander Paraschiy: The deal is
a good start for Ukrzaliznytsia to renovate its outdated park of locomotives,
and it will be beneficial for the local railway machinery industry, which will
capitalize on cooperation in this project. In particular, the most likely
assembler of GE locomotives in Ukraine in the future is Kryukiv Railcar (KVBZ
UK). The project, if implemented in full, will improve the availability of
locomotives for key railway routes that have no electricity (e.g. the most
important route for Metinvest, Kamysh-Zoria – Volnovakha) and will provide
significant fuel economy for Ukrzaliznytsia.

Most likely, the next projects in locomotives will
be focused on the purchase and upgrade of electric locomotives (which are much
younger at Ukrzaliznytsia, but still require upgrades in technologies and have
cost-saving potential). Such projects will unavoidably increase the company’s
financial leverage in the mid-term. Therefore, we remain neutral on RAILUA Eurobonds.