Ukrzaliznytsia reports on event of default, initiates debt restructuring

Ukrainian railway monopoly Ukrzaliznytsia (UZ, RAILUA) has failed to repay on time its debt to several Ukrainian creditors, according to a May 12 company press release. This event of default triggered a cross-default on some other debt, including USD 500 mln in Eurobonds due in 2018, according to the release. The defaults were a result of the war in eastern Ukraine that adversely affected the holding’s operation, it reported. In particular, the holding “doubts” it will be able to retain control over Donetsk Railway (the subsidiary operating in the Donetsk and Luhansk regions of Ukraine, which are partially occupied by pro-Russian terrorists).

The entity does not rule out other events of default. It plans to start negotiations with its creditors on debt restructuring in the coming weeks, aiming to reach “financial sustainability,” according to the press release. UZ’s total debt subject to the debt operation is in the equivalent of UAH 32 bln, its acting chairman reported at a May 12 press briefing, according to the Interfax-Ukraine news agency. He clarified that UZ has already started its talks with local creditors, and upon their completion it will initiate negotiations with international lenders.

As of end-June 2014 (the last reporting date), UZ’s total debt was UAH 29.0 bln (or UAH 41.7 bln, at the current UAH/USD rate), including UAH 10.2 bln of debt in local currency and UAH 18.9 bln (UAH 31.5 bln, at the current exchange rate) in foreign currency. Out of the total debt, 17% was due to Ukrainian entities, 39% was due to entities with Russian capital, and 21% was due to Eurobond holders. Its combined LTM EBITDA was UAH 10.5 bln as of end-1H14.

Alexander Paraschiy: The bond market did not react to the news, as RAILUA bonds finished the May 12 session unchanged. Indeed, there has been no news on UZ’s intention to restructure its Eurobond, given that this paper has been already included in the government’s debt operation program. Recall, Ukraine’s Finance Ministry highlighted several times that the notes of state banks and UZ may fall under individual restructuring conditions.

By having defaulted on some local debt, UZ hints that its financial position is exceptionally weak, which may result in much more fierce Eurobond restructuring conditions as compared to “more solvent” state banks. That said, UZ bonds should yield a negative spread to the 2018 notes of Ukreximbank and Oschadbank. The current YTM spread of RAILUA notes to the banks’ 2018 notes is 750 bp, which might be considered as fair by the market. Instead, we remain skeptical about UZ’s long-term financial sustainability and believe the spread should be wider.

Источник: Конкорд Капитал