Fitch Ratings, an international credit rating agency, has upgraded the long-term foreign- and local-currency Issuer Default Ratings (IDRs) of the Ukrainian Railways joint-stock company (Ukrzaliznytsia) from 'C' to 'CC' and upgraded the long-term rating on the company’s USD-894.9-million senior unsecured Loan Participation Notes (LPN) from 'C' to 'CC.'

The rating agency announced this in a statement, the CFTS portal reports

According to the statement, the upgrades reflect the company's ability to withstand Ukraine's sovereign default on its Eurobond coupon payment due on 1 August.

Fitch has also reassessed Ukrzaliznytsia's Stand-alone Credit Profile (SCP) from 'C' to 'CC', as the company has demonstrated its ability to withstand the sovereign default and this risk no longer affects the assessment. The 'CC' SCP reflects Fitch's view that some form of default appears probable, although it does not appear imminent or inevitable. The SCP takes into account the risk of a significant debt repayment expected in July 2026, when the USD 594.9 million LPNs mature.

Fitch notes that the extended maturity of the USD 594.9 million LPNs is due in July 2026 and a loan payment of USD 300 million is due in July 2028. According to the rating agency, this creates a high refinancing risk for the company as its access to financial markets is very limited. Because of the deferral of coupon payment that was obtained during consent solicitation in January 2023, Ukrzaliznytsia will not pay coupons on the LPNs until January 2025, when the company is due to resume servicing this debt, the rating agency said.

Fitch believes that in a typical situation extraordinary support from Ukraine to Ukrzaliznytsia would be very likely if needed, reflecting a support score of 32.5 (out of a maximum of 60) under Fitch's Government-Related Entities (GRE) Criteria.

Fitch considers a default by Ukrzaliznytsia on external obligations potentially harmful to Ukraine, as it could lead to reputational risk for the state. However, Fitch believes that because the debt management process of the government and Government-Related Entities (GRE) is centrally coordinated, a default by Ukrzaliznytsia would be seen as the government's failure to manage these obligations. "Access to the international debt markets is currently limited for the state and Ukrainian GREs. They all rely on support from international institutions, and we do not see a default disrupting access to this type of financing," Fitch said.

Fitch assesses Ukrzaliznytsia's Risk Profile as 'Vulnerable.'

According to Fitch, Ukrzaliznytsia’s available funds are mostly designated for capital expenditures and do not improve the company's liquidity position for debt servicing. The rating agency notes that Ukrzaliznytsia is in the process of procuring EUR 200 million worth of goods for railway lines under an emergency support project from the European Bank for Reconstruction and Development (EBRD). Together with the available cash and the expected grants, the rating agency believes that this will support capital expenditure needs for 2024, but repayment will pose a challenge in the medium term.

"Ukrzaliznytsia recorded a net profit in 2023, but the expected net result in 2024 is negative. We expect revenue to continue growing in 2024, albeit at a slower pace than expenditure, leading to a worsening of EBITDA in 2024 compared with 2023. High maintenance and renewal capex needs, financed with the new loans will have a negative impact on the final result and cash levels. Ukrzaliznytsia still relies heavily on international support for Ukraine during the war," the rating agency said.

Fitch expects Ukrzaliznytsia’s net adjusted debt to EBITDA to increase to 3.0 in 2024, compared with 2.3 in 2023.