Ukrzaliznytsia downgraded to 'CC' on expectation of debt restructuring - S&P
Standard & Poor's Ratings Services has lowered its long-term foreign and local currency corporate credit ratings on State Railways Administration of Ukraine Ukrzaliznytsia to 'CC' from 'CCC-', reads a posting on the rating agency's website.
"The outlook is negative," reads the report.
"We also lowered our issue ratings on the senior secured loan participation notes due 2018 and issued by financing vehicle Shortline PLC to 'CC' from 'CCC-'," S&P stated.
"The rating action reflects the Ukrainian government's announcement that it will restructure its foreign currency commercial debt, including Ukrainian Railways' loan participation notes, worth $500 million. Under our criteria, we would expect to classify this restructuring of the notes as tantamount to default. In our view, therefore, the default of Ukrzaliznytsia's foreign currency debt is a virtual certainty," according to the statement.
"We consider Ukrzaliznytsia to be a government-related entity under our criteria. As part of our rating action, we have also revised down our assessment of the likelihood that the Ukrainian government would provide timely and sufficient support to Ukrzaliznytsia in the event of financial stress to "moderately high" from "high." We now consider potential support from the Ukrainian government to Ukrzaliznytsia as more doubtful than previously," reads the report.
"We continue to assess Ukrzaliznytsia's financial risk profile as "aggressive," taking into account its increased debt and interest expense following sharp devaluations of the Ukrainian hryvnia in 2014. We calculate that the Standard & Poor's-adjusted debt-to-EBITDA ratio increased to about 2.8x-3.3x at the end of 2014 from just below 2.0x at the end of 2013. Accordingly, we estimate that our adjusted ratio of funds from operations to debt for Ukrzaliznytsia decreased to approximately 18-23% at the end of 2014 from about 33% at the end 2013. Our adjusted EBITDA-interest coverage ratio declined to about 2.5x-3.0x at the end of 2014 from about 3.5x in 2013. We continue to view these metrics as commensurate with the "aggressive" financial risk profile, albeit in the lower end of the category," the rating agency said.
"Our assessment of Ukrzaliznytsia's business risk profile as "weak" incorporates our view of "very high" country risk in Ukraine. In addition, it reflects Ukrzaliznytsia's significant capital-expenditure (capex) requirements to upgrade and renew its infrastructure and fleet. Recent tariff increases should help the company to partly mitigate falling cargo and passenger traffic resulting from the deteriorating economic environment. Still, these increases will not be enough to cover the full restoration of services on the damaged Donetsk Railways and foregone revenues due to suspended services on parts of this railway. However, we acknowledge Ukrzaliznytsia's substantial market share in domestic freight - about 70% - and its monopoly status in domestic passenger rail services and management of the national rail infrastructure," according to the document.
"The negative outlook on Ukrzaliznytsia reflects the likelihood that we would lower our long-term ratings on the company to 'SD' (selective default) and lower the issue rating on its $500 million loan participation notes to 'D' when the restructuring is completed. The outlook also reflects our assessment that headroom under the notes' covenants is very low and that the company may be in breach of them as of year-end 2014. Although highly unlikely, we could take a positive rating action on Ukrzaliznytsia if the restructuring was cancelled," the agency summarized.