Fitch upgrades Ukrainian Railway rating to sovereign level

Fitch Ratings has upgraded the long-term foreign and local
currency issuer default rating for Ukrainian Railway (RAILUA) to B- (from CCC)
with a stable outlook, the agency reported on Nov. 1. The agency attributed its
upgrade to “indefinite removal of unrestructured local debt from cross-default
provisions” of the company’s Eurobond, which occurred last year. The agency
sees that any potential default of Ukrainian Railway “could to some extent
influence the cost of external funds for future debt financing” of the
government and other state-controlled companies. From this standpoint, it
concludes that the company’s rating can be equalized to the sovereign one. As a
positive development for the company, Fitch sees its deleveraging with its net
debt-to-EBITDA ratio having declined to 1.4x in 2017 from 1.7x in 2016 and 2.1x
in 2015, according to the agency’s estimates.

At the same time, Fitch analysts see a risk of
“activation of cross-default provisions with already restructured debt after expiration
of the carve-out consent” in the end of 1H19. If the company’s “attempt to
restructure this debt leads to an impairment of creditors’ original rights,”
Fitch will likely treat such exchange as distressed, the agency highlighted.

Alexander Paraschiy: We agree with Fitch that, after agreeing last year to carve out some
of cross-default clauses, Ukrainian Railway’s risk looks the same as the
government’s one. At the same time, we stress that next year the company will
have to repay USD 300 mln in amortizing Eurobonds – for which the company has
yet to find refinancing (we doubt Ukrainian Railway will be able to repay it
from its own cash flow). That relates the company’s ability to smoothly repay
its Eurobond with its capabiity to secure new debt financing. The company
earlier announced its plan to issue a new Eurobond by the end of 2018, which it
now looks not likely to implement. Therefore, the company will have to work
hard to attract financing in early 2019, which, so far, does not look impossible.