Flash Report /
Ukraine

Ukrainian Railways new 5-year bond

    Kiti Pantskhava
    Kiti Pantskhava

    Senior Credit Analyst

    Tellimer Research
    1 July 2019
    Published by

    Ukrainian Railway (RAILUA) is looking to issue US$500mn 5-year bonds to refinance short-term debt, with initial price talk (IPT) of 8.5-625%, according to Bloomberg. The IPT implies a 220-250bps premium over UKRAIN 24s, a 5-year sovereign benchmark, and is on the tight end of RAILUA 21s-UKRAIN spread in June 2019. While the new deal will materially improve the company’s liquidity profile, addressing a bulk of short-term maturities, the IPT looks aggressive given the challenges posed by cost inflation, FX mismatch and further refinancing needs. 

    Ukrainian Railways is a 100% government-owned railway monopoly rated CCC+ by S&P and B- by Fitch. The company reported moderate leverage of 2.1x in FY 18, but had a shortage of liquidity as half of its US$1.3bn debt was due in 2019. Supported by the state-owned Oschadbank and the State Agency for Support of Infrastructure Projects, RAILUA dealt with the first US$150mn amortisation of the outstanding US$-denominated bonds, but a long-term refinancing solution is necessary.

    Cost inflation puts pressure on margins, despite tariff hikes

    A series of tariff increases across a wide range of services rendered by the company allowed it to grow its US$-equivalent revenues by 7% in 2017 and 11% in 2018, to US$3.1bn. However, this was not sufficient to compensate for cost inflation, resulting in a 15% decline in EBITDA in 2018.

    UAH stabilisation draws attention away from FX mismatch 

    RAILUA’s revenues come mainly in the local currency, while effectively all its debt is denominated in US dollars. In case of a devaluation, this could inflate the interest payments, the leverage and the actual debt repayment if UAH weakens permanently. We have a Hold recommendation on the RAILUA 9.88% 21s.