(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
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
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.