The announcement by the State Railway Administration (Ukrzaliznytsia) that it is unable to fulfill its credit obligations came as no surprise. The only surprise is the list and volume of the loans it plans to restructure. Ukrzaliznytsia had few other options remaining because it has lost control of the Donetsk Railway, it has seen the biggest drop in freight transport volumes in a decade, and it is unable to transfer these losses to the stagnant economy by raising rates.
At a time when the Ministry of Finance has been working with international creditors for about a month on restructuring Ukraine’s sovereign and quasi-sovereign external debts (Eurobonds issued by Oschadbank, Ukreximbank, Ukravtodor, and city councils), the fate of Ukrzaliznytsia’s Eurobonds was practically a foregone conclusion.
The only debate surrounded the advisability of including domestic debts in the list of debts to be restructured.
The debt of the state monopoly totals UAH 37.5 billion, out of which UAH 5 billion is owed to the European Bank for Reconstruction and Development (EBRD) and the Export-Import Bank of Korea and excluded from the debt-restructuring program. Eurobonds total an additional UAH 10 billion and the remainders are the UAH 22 billion owed to domestic creditors (mainly banks) and the UAH 11.2 billion owed to Russian creditors.
The big question to the management of the state monopoly is why only 25% of the debt is denominated in the local currency and 75% in foreign currencies (72% in dollars and 2% in euros), according to the company’s financial statements for the first half of 2014. As a result of the devaluation of the hryvnia to UAH 21 per USD, the company’s foreign-currency liabilities exceeded 80% while its total debt increased from UAH 25.3 billion to UAH 37.5 billion.
Naturally, the devaluation of the hryvnia by more than 60% and the fall of transport volumes by a monthly average of more than 20% over the past nine months (from August 2014 to April 2015), compared with the corresponding period of the previous year, due mainly to the fighting in the east of the country, affected the company's financial results. In fact, the volume of transportation by rail has been below the ten-year lows since the summer of last year.
Thus, Ukrzaliznytsia’s insolvency is unlikely to be far-fetched. Moreover, work with a committee of creditors should answer numerous questions about the quality of the Ukrzaliznytsia assets that are actively being discussed during the process of its reorganization into a joint-stock company.
Considering the constructive attitude of the government and the top management of state-owned companies in their communications with creditors (the readiness raise yield rates and avoid writing off debt in case of prolongation of the periods of loans), the talks on Ukrzaliznytsia’s debt should be productive. This will allow the company to restructure itself on the eve of the long-awaited reforms and eventually return to the capital markets as a more transparent and reliable borrower.