(The following statement was released by the rating agency)
May 22 - Fitch Ratings has assigned the State Administration of Railways Transport of Ukraine (Ukrzaliznytsia) (UZ) Long-term foreign and local currency ratings of ‘B-', a National Long-term rating of ‘BBB+(ukr)’ and a Short-term foreign currency rating of ‘B’. The Outlooks for the Long-term ratings are Stable.
UZ’s ratings reflect the company’s key role in the management of the national railways system and its strong legal, strategic and operational links with the Ukrainian government, which has approval powers on all strategic decisions, including tariff setting, investment and debt planning. Although UZ is the sole rated entity, its ratings also factor in the opacity of links with railways companies it manages and contingent risk stemming from the liabilities of those railways companies.
Fitch notes that weaker links with or a lack of prompt government support in case of need could lead to a rating downgrade. Conversely, clearer links with operating railways companies in a context of forthcoming sector reform along with more formalised state support could be positive for the ratings.
UZ’s mandate is to manage the six state-owned regional operating railways companies and a number of auxiliary enterprises (UZ Group). Although there are no legal ownership ties with these companies, UZ acts as a Group’s management company. It controls most of the Group’s financial flows and sets debt policy of the Group, and, in its capacity of group manager, signed certain loan agreements jointly with borrowing operating entities. The government plans to streamline this complex structure grouping UZ and the six railways operators under a new 100% state-owned joint stock company as part of the reform process during 2012-2013.
UZ Group is one of the largest state monopolies, one of the major national taxpayers and the largest employer. It also plays a crucial role in the Ukrainian economy development as it manages 72% of total cargo traffic. The profitable freight business allows national government to cross-subsidise the loss-making - but politically and socially sensitive - passenger segment. Fitch believes the government’s grip over UZ Group will be unchanged after the completion of reform.
Leveraging on its profitable freight business, with Fitch estimated EBITDA at UAH12.3bn in 2011, UZ Group plans to moderately re-leverage its balance sheet to fund its UAH53bn cumulative investments in 2012-2016 for the upgrade of the railway network and rolling stocks. Debt to EBITDA ratio should remain comfortably below 2.5x unless higher-than-expected economic slowdown causes an unexpected drop in traffic volumes and. as consequences, revenue and cash flow decline. To support its large capex programme, UZ Group plans to increase tariffs by 35% in 2012-2016. However Fitch believes that long term visibility on tariff increase is limited as, in the past, the government unexpectedly frozen tariffs for freight (in 2009-2010) and passengers (2010-2011).
UZ’s balance sheet is free of debt. However, at the group level, the long-term nature of its asset structure does not fit well with the short-term nature of its debt, about 40% of which matures within one year. In 2009, railway operating companies missed a repayment on a bank loan totalling USD110m, with terms subsequently rescheduled in 2010 by means of obtaining lenders’ consent to restructure the loan. Additionally several covenants under long-term loan agreements of operating companies were breached. However, the company has obtained respective waivers from the lender.
Group liquidity is tight as cash and undrawn facilities cover only 70% of the remaining debt maturities (UAH4.8bn) in 2012 and UAH2.7bn negative free cash flow expected by Fitch during 2012. In this context, stable access to banks and capital markets is essential for UZ Group, although the existing capex flexibility mitigates the risk.
A credit analysis on UZ will shortly be available at www.fitchratings.com.