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Fitch Affirms Ukrainian Railway at 'CCC'

March 21, 2017 | Cbonds

Fitch Ratings has affirmed Ukrainian Railway's Long-Term Foreign Currency Issuer Default Rating (IDR) at 'CCC', Long-Term Local Currency IDR at 'RD', Short-Term Foreign Currency IDR at 'C' and National Long-Term rating at 'RD(ukr)'.
The Long-term foreign currency rating on Shortline Plc's USD500 million loan participation notes (LPNs) has also affirmed at 'CCC'.
Fitch views Ukrainian Railway as a credit-linked entity under its "Rating of Public-Sector Entities Criteria", reflecting the entity's 100% state ownership, strong legal linkage with the state, strategically important role as the largest natural monopoly and tight state control over company's operations. Ukrainian Railway's ratings are one notch below the Ukraine's sovereign ratings (B-/Stable), which reflects mid-range integration with government finance evidenced by reduced state support over last few years.
The 'Restricted Default' Local Currency IDR and National Long-Term rating reflect a failure to make principal payments under certain bilateral loan agreements with Ukrainian lenders and that the company is currently restructuring these domestic liabilities.
Shortline Plc's notes' rating is equalised with Ukrainian Railway's Long-Term Foreign Currency IDR, reflecting Fitch's view that the notes constitute direct, unconditional senior unsecured obligations of Ukrainian Railway and rank pari passu with all its other present and future unsecured and unsubordinated obligations.
Legal Status Assessed as Mid-range
Fitch considers the Ukrainian Railway's legal links with the state to be moderate as the company lost its state administration status in recent railway sector restructuring. Ukrainian Railway was established as 100% state-owned public joint stock company by the resolution of the Ukraine's cabinet of ministers. The company is a legal successor of the State Administration of Railways Transport of Ukraine, the six regional railway enterprises and other railway transport enterprises, which were combined with effect from 1 December 2015. There is no plan for company privatisation.

Strategic Importance Assessed as Stronger
Ukrainian Railway will remain a strategically important transportation company and will continue to manage the national railway infrastructure, and provide dispatching, passenger transportation (long-distance and suburban), and dominant freight services. The company is recognised as a natural monopoly in the area of access to public service infrastructure for railway transportation and controlling maintenance of railway transportation.
Control Assessed as Stronger
Ukrainian Railway operates under strong control and oversight from the state. Since January 2017 the company reports directly to cabinet of ministers of Ukraine. This has increased the state's involvement in the company's operating activity and strengthened state control over its performance. The national government approves the company's strategic objectives, including tariff settings, debt and investment planning and appoints members of the board of directors and supervisory board. The latter has seven members, and is headed by the first deputy head of the ministry of infrastructure. Other members are top government officials from ministries of finance, economy and infrastructure.
Integration Assessed as Mid-range
Fitch considers the entity's integration into the general government sector as moderate. The company's accounts are not consolidated in the central government's budget. The company receives annual, albeit very modest, transfers from the national and local budgets, which partly cover cost of public transportation for certain group of population. During the January-June 2016 these subsidies totalled UAH10 million (2015: UAH182 million). This was a low 0.3% of total revenue and usually the company cross-subsidises the loss-making passenger sector with profit from cargo transportation. The state did not provide a capital injection in 2016.
The company's debt is not consolidated with state debt. However, part of the company's foreign debt owed to international financial organisation (13.8% of total debt) is guaranteed by the state. In addition, the government treats Ukrainian Railway's foreign debt as quasi-sovereign debt, which was evidenced in 2016, when the company's foreign debt (structured via Shortline LPNs) was included into the restructuring negotiations being pursued by the national government with respect to the state debt. This highlights the interconnected credit quality between Ukrainian Railway and the sovereign.
Ongoing Debt Restructuring
The company is under ongoing restructuring of its domestic debt (unaudited 2016: UAH21.5 billion), of which 44% was restructured as of March 2017 and another 21% of outstanding domestic debt should be restructured by end-2017. The company remains current on 15% of outstanding domestic debt, which consequently was not subject to restructuring. The remaining 20% domestic debt was originally contracted by Donetsk Railway and is not part of the debt restructuring, or part of Fitch's calculation of the issuer's debt, as the company lost access to assets in the Donetsk and Lugansk territory due to armed conflict in the east of the country.
In March 2016 Ukrainian Railway successfully completed the restructuring of USD500 million of Shortline's LPNs, including an extension of the maturity to 15 September 2021 and an increase in the interest rate to 9.875% (original maturity was 2018 and coupon rate was 9.5%).
Distressed Macroeconomic Environment
Ukrainian Railway has been negatively affected by the large scale economic crisis and subdued economic activities in the country since end-2014. This was due to long-lasting political instability, local currency devaluation, amid sharply contracted manufacturing and the weak financial sector.
According to Fitch's estimates, the Ukraine economy returned to growth in 2016 after severe contractions in 2014-2015 and will grow 2.5%-3.0% in 2017-2018. The recovery of economic activity is likely to be gradual, in Fitch's view, led by construction and agriculture, and some manufacturing rebound from the previous years' collapse. The unresolved conflict in eastern Ukraine will continue to weigh on the recovery prospects, while lack of access to Donetsk and Lugansk's assets will impact Ukrainian Railway's financials.
As Ukrainian Railway's Long-Term Foreign Currency IDR is credit-linked with that of Ukraine, it will likely mirror any rating action on the sovereign's Long-Term Foreign Currency IDR. Any weakening of the linkage with the government could result in a wider notching down from the sovereign ratings.
Fitch will also review and re-rate the company's Local Currency IDR and National Long-Term rating once the company has completed its domestic debt restructuring and information is available on its post-restructuring credit profile.
The rating on Shortline Plc's LPNs is equalised with Ukrainian Railway's Long-Term Foreign Currency IDR and therefore will move in tandem with Ukrainian Railway's Long-Term Foreign Currency IDR.
Fitch considers that non-payment on domestic debt originally contracted by Donetsk Railway does not affect the company's other debt service.

Company: Ukrainian Railway

Full company nameUkrainian Railway
Country of riskUkraine
Country of registrationUkraine


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