S&P lowers Ukrainian Railways rating by two notches on increased refinancing risk

S&P Global Ratings reported on April 21 that it had
downgraded the long-term issuer credit rating on Ukrainian Railways (RAILUA) to
CCC from B- and placed the ratings on CreditWatch with negative implications.
The company is approaching the maturity of a USD 116 mln (UAH 3.2 bln) loan to
a local bank on May 30, S&P reported, adding that refinancing options for
the loan are limited. This is a part of the loans from Sberbank (total amount
USD 200 mln) restructured in July 2020.

According to S&P, the company’s available cash and
undrawn lines amounted to UAH 2.3 bln as of April 16, as well as UAH 2 bln cash
flow that the company can accumulate by the end of May, “are barely sufficient
to meet upcoming maturities and other financial commitments.” Therefore, the
likelihood increases that the company will have to restructure the due
repayment, S&P concluded.

Ukrainian Railways is working on different refinancing
options “but has not yet secured refinancing for its immediate maturity,”
S&P stated. The agency noted that the company “has advanced in negotiations
with some local banks and one international financial institution,” though it
does not rule out delays in the process.

S&P could further lower Ukrainian Railways’
rating  if it undertakes actions that the agency views as “a distressed
exchange or default” (i.e., if it gives the creditor less value than originally
promised). S&P would likely affirm the rating or raise it by one notch to
CCC+ “if the company secures long-term refinancing for its upcoming maturity or
accumulates sufficient liquidity to repay the loan.”

Alexander Paraschiy: If the lender had not been a bank with sanctions imposed upon it by
the Ukrainian government, the negotiation process could have been much easier
for the company, the bank and potential third party lenders. It seems like the
only two options for Ukrainian Railways to avoid the new restructuring or
technical default are to accumulate all the available liquidity to make the
repayment (which looks possible, taking into account the numbers presented by
S&P), or get fast refinancing from a related (state-controlled) bank. In
any case, we see a high likelihood that Ukrainian Railways will avoid a
default, otherwise this will have negative consequences for the entire quasi-sovereign
universe.