Fitch Ratings, an international credit rating agency, has downgraded the Long-Term Foreign-Currency Issuer Default Rating (IDR) of the Ukrainian Railways joint-stock company (Ukrzaliznytsia) from 'C' to 'Restricted Default' (RD) following the execution of the consent solicitation to defer its debt servicing of its U.S. dollar-denominated loan participation notes (LPN) maturing in 2024 and 2026.

Fitch Ratings announced this in a statement, the CFTS portal reports.

According to the statement, Fitch Ratings also downgraded Ukrzaliznytsia’s Long-Term Local-Currency IDR from 'C' to 'RD' and lowered the company’s Standalone Credit Profile (SCP) to 'rd' from 'c' because it views the consent solicitation as a distressed debt exchange (DDE).

The rating agency simultaneously upgraded the IDRs from 'RD' to 'CC' and revised the SCP from 'rd' up to 'cc,' reflecting Ukrzaliznytsia's post-restructuring profile, which still has a high level of credit risk.

According to the rating agency, the upgrade of the IDRs to 'CC' reflects still high credit risk for the company, given the unstable and unpredictable operating conditions and forecast negative cash flows in 2023.

According to the statement, Ukrzaliznytsia's outstanding debt was UAH 39.5 billion at the end of 2022 (compared with UAH 33.5 billion in 2021). The LPNs constituted 82.8% of the debt, and 94.3% was foreign currency (90.6% in 2021).

After the extension of the notes' maturity, the maximum annual repayment of the debt in 2023–2025 accounts for around 4% of the total debt. Major repayments are 58% of the current total debt in 2026 (mainly of the USD-595-million LPN maturing in 2026) and 32% after 2027 (mainly of the USD-300-million LPN maturing in 2028).

"The deferral rd. of the coupon payment on the LPNs gave the company some space for undisturbed operations. However, increasing opex (operating expenses) and capex (capital expenditures) needs will pressure the company's cash levels in 2023," Fitch Ratings said in the statement.

According to the statement, Ukrzaliznytsia expects negative cash flow throughout most of 2023. The company is prioritizing 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 the availability of funds from international financial institutions. Almost EUR 400 million should be available to the company, including EUR 199 million under existing financing facilities with the EBRD and the EIB, and EUR 200 million under the process of acceptance.

“Ukrzaliznytsia receives modest annual transfers from national and local budgets, which do not fully cover costs of transporting passengers. Losses incurred in this segment are cross-subsidized with profits from freight transportation… Ukrzaliznytsia expects that the state will provide about UAH 27 billion to fund 54% of its total planned investment in 2023. The sovereign is supportive of Ukrzaliznytsia, but its ability to provide extraordinary support to the company is limited by the ongoing invasion from Russia,” Fitch said in the statement,” Fitch said in the statement.

According to the statement, Fitch Ratings classifies Ukrzaliznytsia as an entity linked to the Ukrainian sovereign under its GRE Rating Criteria and has linked its ratings to the sovereign ratings.

Ukrzaliznytsia's cost structure is fairly stable (excluding non-cash items, such as currency risk), and it is dominated by staff costs averaging about 65% of operating expenses (excluding non-cash items) in the first half of 2022 and 61% in 2017-2021, followed by maintenance costs and goods and services at 32%.