S&P Global Ratings has downgraded JSC Ukrainian Railways (Ukrzaliznytsia) from "B-" to "CCC" on increased refinancing risk.

"Ukrainian Railways JSC's $116 million loan with a local bank matures on May 30, 2021. The company is working on various refinancing options but has not yet secured refinancing for this payment. Ukrzaliznytsia's liquidity on hand is tight and capital markets remain turbulent, so we think the company currently depends on favorable business and financial conditions to meet its financial commitments in a timely manner… We are lowering our long-term issuer credit rating on UR to 'CCC' from 'B-' and placing the ratings on CreditWatch with negative implications," S&P said.

S&P said that Ukrzaliznytsia's 2020 results were weak, as expected, on the back of lower cargo transportation volumes and limitations on passenger traffic due to COVID-19 disruptions. Freight revenue was down 10% and passenger revenue down 59% from 2019. S&P Global Ratings-adjusted funds from operations (FFO) to debt was 17% in 2020 compared to 37% in 2019.

"For 2021, we expect FFO to debt of about 30%. This is because we forecast a recovery in freight volumes, which started only in March, so we anticipate UR will generate most of its 2021 operating cash flows in the second half of the year," S&P said.

S&P forecasts 2021 capex of UAH10-15 billion compared to Ukrzaliznytsia's potential investment needs of up to UAH 27 billion and maintenance capex of UAH 6-7 billion.

"The CreditWatch placement with negative implications indicates we could lower our rating on Ukrzaliznytsia if we think it is unable to refinance its loan with the local bank due on May 30, 2021," S&P said.

"We would likely affirm the rating or consider raising it to 'CCC+' if the company secures long-term refinancing for its upcoming maturity or accumulates sufficient liquidity to repay the loan," S&P said.

In turn, Ukrzaliznytsia said that the reason for the agency's decision to downgrade is solely the S&P methodology for determining the rating level depending on the time left until the next maturity date.

"The only factor in this decision is the maturity of a part of the loan in favor of JSC Sberbank, which falls on May 30 of this year, in the COVID-19 circumstances is approaching. As both the financial market and the agency know, Ukrzaliznytsia is working on several options for refinancing this debt and undoubtedly will not allow default on loan obligations," Ukrzaliznytsia said.