S&P upgrades Ukrainian Railways rating to CCC+

S&P Global Ratings raised the long-term issuer
credit rating of Ukrainian Railways (RAILUA) by one notch to CCC+ with a Stable
outlook, the agency reported on July 29. According to S&P, the company has
alleviated liquidity pressure by raising USD 300 mln from the recent Eurobond issue, which
allows it to repay some of the short-term debt, including USD 131 mln loans
from Sberbank. At this time, the contractual debt payments for the rest of 2021
have reduced to USD 58 mln (from USD 160 mln), and for the year 2022 to USD 35
mln from USD 131 mln, S&P calculated.

Among the key risks for the company’s liquidity,
S&P sees litigation by VR Global Partners which demands repayment of USD
153 mln debt (which the creditor bought from Prominvestbank in 2019).
Recall, in May, a Ukrainian court suspended the enforcement
of debt claims from VR Global Partners. If the litigation will lead to the need
of Ukrainian Railways to repay the debt, this could lead to a worsening of the
company’s rating, S&P stated. At the same time, “material state support” or
“stronger cash flows” resulted from improving operating conditions may lead to
an upgrade of the company’s rating.

Recall, last week, Fitch Ratings confirmed the
company’s B rating and removed it from Rating Watch
Negative.

Alexander Paraschiy:  The move is fully in line with our expectations. If there is no
new wave of COVID in Ukraine and economic growth goes as planned, and if the
government confirms its plans to support new projects of Ukrainian Railways
with budget money, we expect further improvement of the company’s credit rating
from S&P. Claims by VR Global Partners add some risk to Ukrainian Railways’
mid-term liquidity, but we expect the company would be able to restructure this
debt in a way that does not affect its cash flow much. That said, RAILUA bonds
look like the most attractive in Ukraine’s quasi-sovereign universe.