Ukrzaliznytsia wants to boost freight rates 30% in February

The State Railway Transport Administration of Ukraine, also known as Ukrzaliznytsia (UZ, RAILUA), is working on a draft government resolution that will enable it to raise freight transportation rates by 30% as of Feb. 1, 2015, the Interfax-Ukrayina news agency reported on Nov. 12, citing the company’s press service. The rate revision is necessary for UZ to stabilize its revenue amid falling transportation volumes, as well as investment into its rolling stock, which has been worn out by nearly 90%, the company said.

Besides that, the company will need financial reserves to rebuild damaged infrastructure in Donbas, the cost of which is estimated at UAH 900 mln. The company last revised its freight rates in July, when they were hiked by 12.5%, according to Interfax.

Alexander Paraschiy: As we wrote before, the combined EBITDA of all UZ subsidiaries improved 9% yoy in 3Q14, despite tough conditions for the railway operator in eastern Ukraine. That was the result of cost-saving measures and improved rates. A further increase in rates and new cost-saving initiatives, if they happen, will enable UZ’s subsidiaries to significantly improve their operating profit.

At the same time, a possible improvement in P&L would bring more risks than benefits for the holders of UZ bonds, we believe. It would enable the entity to increase its leverage, and we don’t doubt UZ would use this opportunity owing to its postponed CapEx appetite, prompted by its asset replacement needs. Yet needless to say, higher leverage would only increase the risks of UZ’s worsening credit profile and will make it more vulnerable to any macro and political shocks.