Ukrainian Railways manages to cancel USD 153 mln debt sale to VR Global

An appellate court in Kyiv ruled on Sept. 16 to recognize
as invalid the sale of USD 153 mln debt of Ukrainian Railways (RAILUA) from
Prominvestbank to VR Global Partners in February 2019, Interfax-Ukraine
reported on Sept. 17 citing the debt buyer. VR Global Partners called the
ruling “a travesty of justice” and promised to appeal to the Supreme Court.
Richard Deitz, top manager of VR Global Partners, commented that he is not
surprised by this decision, as he had had a meeting in the presidential office
in July, where the office deputy head Andriy Smyrnov made it clear that the
Ukrainian courts won’t support VR’s position in its litigation with Ukrainian
Railways.

At this time, the mentioned court ruling is not
publicly available, but we understand that this was Ukrainian Railways’ appeal
to a July ruling of Kyiv Economic Court. Recall, in May, Ukrainian Railways
initiated a court litigation demanding to recognize the sale of
its debt to VR Global Partners as invalid. The railway
operator claimed that the sale-purchase agreement was a “factoring agreement”
which VR Global Partners does not have the right to do, according to Ukrainian
legislation. However, on July 27, Kyiv Economic Court denied Ukrainian
Railways’ claim. Namely, the court came to the decision that sale of debt at
the discount to par value has nothing to do with a “factoring agreement,” based
on Ukrainian legislation.

Recall, VR Global Partners purchased the debt of
Ukrainian Railways to Prominvestbank in February 2019. Based on the deal, the
total obligation of the railway operator to the bank of USD 255.1 mln was sold
at USD 123.5 mln. The initial par value of this debt is about USD 153 mln.
Ukrainian Railways “strongly recommended” potential buyers
to refrain from the deal in February 2019.

Alexander Paraschiy: Ukrainian
Railways has not foreseen the repayment of VR debt in its 2021 business plan,
so the government is doing its best to “make this plan happen.” The issue of
the Prominvestbank debt has become politicized since the bank (as a subsidiary
of a Russian state entity) fell under Ukrainian sanctions in 2017 and (unlike
the other sanctioned bank, Sberbank-Ukraine) refused to find common ground with
Ukrainian Railways on loan restructuring. Therefore, in the eyes of Ukrainian
authorities, by purchasing the debt from Prominvestbank, VR took the position
of the “uncommunicative  Russian bank.”

We are yet to see what arguments the appellate court
used to find the signs of a “factoring agreement” in the debt sale-purchase
deal. From the ruling of the first-tier court, there are no such signs. Thus
far, we treat the recent court ruling as an attempt of the government to help
postpone the debt repayment by Ukrainian Railways for as long as possible.

The ruling only proves the poor application of the
rule of law in Ukraine and the dependence of Ukraine’s court system on the
presidential office, which makes presidential claims that his office does not
control the courts seem inconsistent.

For Ukrainian Railways, the ruling is unlikely to have
negative consequences. The only possible effect is a hardship in the placement
of additional Eurobonds this autumn.
But taking into account that all RAILUA bondholders have been aware of this
debt issue for many years, we do not see that the new wave of this conflict
will affect demand for new bonds.