Ukrzaliznytsia pays first coupon, Fitch affirms its “C” rating

Ukrainian railway monopoly Ukrzaliznytsia (UZ, RAILUA) paid its first coupon on its restructured Eurobond on March 21, it reported the next day. The company said a delay with listing its Eurobonds on the Irish Stock exchange, due to technical issues, caused a delay in coupon payment, which was due on March 15. The first coupon amounts to USD 15.8 mln, we estimate. Recall, the holders of Ukrzaliznytsia’s USD 500 mln Eurobond maturing in May 2018 voted on Feb. 17 to exchange them for new bonds, with ultimate maturity in September 2021, amortized repayment and a slightly higher coupon (9.875%, up from 9.5%).

In other news, Fitch Ratings reported on March 22 it assigned a long-term foreign currency issuer default rating for Ukrainian railway monopoly at “C” and its local currency rating at “Restricted Default.” The ratings did not change from Fitch’s previous action. The low local currency rating “reflects a failure to make principal payments under certain bilateral loan agreements with Ukrainian lenders,” Fitch explained.

Alexander Paraschiy: The news above does not change our view of the Eurobond of Ukrzaliznytsia – we do not see any reasons for the bond to appreciate, while we believe the holding’s strong fundamentals in 2015-2016 will support the price of its bonds in the short term. On the longer horizon, RAILUA’s price has more downside potential, we believe.

Fitch’s rating of Ukrzaliznytsia is two notches below that of poultry producer MHP (MHPSA) and state banks Oschadbank (OSCHAD) and Ukreximbank (EXIMUK), while RAILUA bonds trade at just a 200 bps spread to these better-rated bonds. The upside risk for the bond is very limited, we believe. Interestingly, RAILUA trades at a negative spread (about 1300 bps) to the bonds of Ferrexpo (FXPOLN), which are rated one notch better by Fitch. In this case, a negative spread looks justified, we believe, given the smaller short-term risks of Ukrzaliznytsia as compared to Ferrexpo.