S&P upgrades Ukrainian Railway long-term rating to CCC+

S&P Global Ratings upgraded the long-term issuer
credit rating of Ukrainian Railway (Ukrzaliznytsia, RAILUA) to CCC+ from SD,
the agency reported on Apr. 25, stressing the firm “has largely completed the restructuring
of its debt and completely removed the cross-default provisions of its
notes.”  The agency also confirmed the company’s Eurobond rating at
CCC+, or one notch below sovereign rating. Recall, in December, Ukrainian
Railway received a consent from Eurobond holders
to carve out the cross-default clause on a USD 153 mln banking debt for an
indefinite time, and on a USD 311 mln banking debt till end-1H19.

The ongoing restructuring of the USD 153 mln debt
(owed to the Ukrainian subsidiary of a Russian state bank) “does not affect
Ukrzaliznytsia’s ability to continue operations, capital spending, and
servicing other outstanding debt,” the ratings agency concluded. It also warned
that “certain local regulations prohibit Ukrzaliznytsia from meeting all the
requirements on some of its already restructured, and currently performing,
bank loans,” possibly referring to sanctions imposed by the Ukrainian
government on the local subsidiaries of Russian state banks.

S&P said it may revise its Ukrzaliznytsia rating
“depending on the actions the company might take to amend the terms of its bank
debt.” If the company performs a “distressed restructuring,” the issuer rating
will be lowered. However, if the restructuring will be considered to be
“opportunistic,” or the company refinances the debt in question, its rating
will be upgraded. 

In other news, Ukraine’s Cabinet approved on Apr. 25 a
local bond placement by Ukrainian Railway in the total amount of UAH 2 bln,
Interfax-Ukraine reported. Concorde Capital was approved as underwriter of the
bonds, according to Interfax-Ukraine.

Alexander Paraschiy: S&P’s
upgrade of the company’s rating is neutral for its Eurobonds, as it largely is
a consequence of bondholder consent to waive cross-default on some banking
debt. At the same time, the move is positive for Ukrainian Railway as a whole,
as it broadens its ability to borrow new money.

The company may decide to increase its net debt by
about UAH 9 bln this year, based in its 2018 business plan. Its Net Debt to
EBITDA ratio of 1.65x in 2017 – and forecasted 2.1x ratio for 2018 – suggest
the company has the capacity to borrow more without threatening its
debt-servicing capacity. We retain our neutral view on RAILUA Eurobonds.