Fitch Ratings has downgraded JSC Ukrainian Railways (Ukrzaliznytsia, UR) Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'Restricted Default' (RD) from 'C' following the execution of the consent solicitation to defer its debt servicing of its US dollar loan participation notes (LPN) maturing in 2024 and 2026. Fitch views the consent solicitation as a distressed debt exchange (DDE).

However, upon its completion, Fitch has upgraded its long-term rating to 'CC' and the credit profile to 'cc,' reflecting UR's post-restructuring profile, "which still has a high level of credit risk" on the back of expected operating losses and a negative cash flow, the agency said on Monday.

It is noted that UR's outstanding debt at end-2022 was UAH 39.5 billion (2021: UAH 33.5 billion). The LPNs constituted 82.8% of the debt, and 94.3% was foreign currency (2021: 90.6%). After the extension of the notes' maturity, the maximum annual repayment of the debt in 2023-2025 accounts for around 4% of total debt. Major repayments are in 2026 - 58% of current total debt (mainly of the $595 million 2026-LPN) and after 2027 - 32% (mainly of the $300 million 2028-LPN).

"Deferral of the coupon payment on the LPNs gave the company some space for undisturbed operations. However, increasing opex and capex needs will pressure the company's cash levels in 2023," Fitch said.

"UR expects negative cash flow throughout most of 2023. The company is prioritising expenditure that is vital for the continuity of its operations and critical infrastructure. Expected net losses will further pressure liquidity, with the company relying on support from the state and availability of funds from IFIs. Almost EUR 400 million should be available to the company, with EUR 199 million under existing financing facilities with EBRD and EIB, and EUR 200 million under the process of acceptance," Fitch said.

The Ukrzaliznytsia financial condition Z is affected by the ability of the budget to compensate the company for the cost of transporting passengers, which are subsidized by profits from freight traffic. In 2022, some UAH 10 billion was allocated for these purposes. In 2023, Ukrzaliznytsia expects to receive about UAH 27 billion to finance 54% of the total planned investment, Fitch said in the statement.

"The sovereign is supportive of UR, but its ability to provide extraordinary support to the company is limited by the ongoing invasion from Russia," the agency said.

Fitch classifies Ukrzaliznytsia as a sovereign related entity and links its ratings to the sovereign's.

Among the factors that will also have a serious impact on the Ukrzaliznytsia financial condition, Fitch includes the cost of fuel and electricity in 2023, natural gas prices, repair and maintenance of rolling stock, and foreign exchange losses. At the same time, the company's cost structure, according to Fitch, remains stable (excluding, in particular, foreign exchange risks). The prevailing expense items are personnel (on average, about 65% of operating expenses in the first half of 2022 versus 61% in 2017-2021) and maintenance and goods and services.