S&P upgrades Ukrainian Railways rating to B-

S&P Global Ratings upgraded on July 29 the long-term
issuer credit rating for Ukrainian Railways (RAILUA) to B- from CCC, keeping
the rating’s outlook at Negative. The upgrade reflected  “the removal of
immediate liquidity pressure” following the company’s successful restructuring of about USD 200 mln in loans from
Sberbank Ukraine, which were due on July 31 (the
loans were 50% of the company’s total debt due this year). S&P assessed the
restructuring deal as “opportunistic rather than distressed,” estimating that
the lender “is receiving the originally promised value.”

S&P stressed that the company still faces sizeable
debt repayments in the next 12 months, or about USD 300 mln, including the
amortization of its 2021 Eurobonds (USD 50 mln in September and March) and USD
120 mln of Sberbank loans in May. The rating agency sees a risk that the
company won’t be able to refinance such debts “well ahead of the maturity,”
though it estimates that the company’s current liquidity and future operating
cash flow “could largely cover upcoming maturities” at minimum CapEx. Ukrainian
Railways had USD 127 mln in its cash balance as of July 1, as well as about USD
135 mln in committed credit facilities, S&P wrote. The agency estimates the
company will be able to generate about USD 400 mln in operating cash flow in
the next 12 months.

S&P could downgrade Ukrainian Railways’ rating in
case the company won’t be able to generate funds for upcoming debt repayments
or fails to refinance them. S&P expects that management will complete its
refinancing or “will develop a credible refinancing plan” by end-2020.

Alexander Paraschiy: The
extension of a majority of Sberbank’s loans to just May 2021, as alleged by
S&P, indeed does not remove the headache for Ukrainian Railways (initially,
total debt due in 2021 was just USD 112 mln). Throughout its history, the
company has resolved its liquidity issues at the last minute, which was making
the company’s stakeholders nervous and which was reflected in its lower credit
rating, as compared to the sovereign. If that strategy doesn’t change, the
company will remain the most risky among Ukraine’s quasi-sovereign bond
issuers. That said, we are keeping our neutral view on RAILUA bonds.