Ukrainian state railway operator “Ukrzaliznytsia” (UZ) has decided to capitalize about $160 million of accumulated interest on Eurobonds and asks their owners to postpone the payment of future interest for another 12 months (the second support period) as well with the possibility of their capitalization to preserve liquidity in a difficult financial situation due to Russian military aggression.
“The Group will use this period to work with its stakeholders (including the Government of Ukraine) and partners (such as international financial institutions) to prepare a long-term proposal and refinancing solution for its Eurobond investors, which will require a more established operating environment which, as we can hope to see in 2025 (and before the end date of the second support period)”, – notes “Ukrzaliznytsia”.
It is clarified that $594.9 million worth of Eurobonds due on July 9, 2026 and a rate of 8.25% are capitalized in the amount of $108.28 million, which increases the volume of this issue to $703.18 million, while $300 million worth of Eurobonds with repayment on July 15, 2028 and a rate of 7.875% – for the amount $51.9 million, which increases the output to $351.9 million.
It states that each bond’s arrears begin on the next scheduled coupon date in January 2025, the arrears will continue to accrue at the same coupon rate, and each bond’s maturity date remains unchanged. At the same time, UZ reserves the right to repay deferred amounts at any time during the second support period.
The company in these 12 months plans to limit the outflow of cash, maintain liquidity by raising only such new debt that will exceed the amortization of the principal debt, and maintain the ability to service its leases and short-term loans for working capital, which are an important part of the company’s day-to-day operations.
In addition, the company is asking bondholders to allow it to raise new long-term financing with an average maturity after July 2028, to allow the raising of up to EUR99 million under the soft, state-guaranteed EBRD loan in 2023, and to clarify the mechanisms for prepayment and subsequent cancellation of the bonds in the documentation to give UZ will be able to better manage its debt.
It is assumed that the UZ will attract about EUR 20 million of preferential financing from the EBRD under the guarantees of Ukraine.
“The Group believes that the state, having carried out a comprehensive restructuring of its own Eurobonds in 2024, may find it difficult to justify the provision of budgetary or other assistance to the Group if it continues to service its debt according to the originally planned schedule,” the document also states.
According to the announcement, applications from bondholders for consent to such a request are accepted until December 27 inclusive, the company is ready to pay participants a reward of 0.5% of the nominal amount. The meeting to approve the company’s proposals is scheduled for December 31, the quorum is 2/3, of which 75% must vote “for”.
It is also noted that Dragon Capital and JPMorgan Securities provide assistance in the UZ operation, and a conference call with owners of Eurobonds is scheduled for December 18.
In justifying the proposal, the UZ emphasizes that Ukraine continues to be exposed to the armed aggression of the Russian Federation, which targets vital civil and industrial infrastructure, in particular, intensifying attacks on the energy system, which leads to further deterioration of the company’s business, results of its operations, financial condition and prospects, including forecasts regarding expected indicators in 2025 and beyond.
In particular, UZ expects its EBITDA to be around UAH 1.0 billion in the fourth quarter of 2024, after declining to UAH 3.3 billion in the third quarter of 2024 from UAH 6.6 billion and UAH 6.9 billion in the first and second quarters. As a result, the company currently estimates that in 2024 its net loss will be between UAH 1.5 billion and UAH 2.5 billion, depending on exchange rates and related costs, as well as the consequences of Russian attacks.
It is noted that in December 2024, the UZ supervisory board approved proposals for indexation by 37% of regulated freight rates, which are expected to cover the most important operational needs, as well as minimal capital costs to keep key assets in good working order, while without EBITDA indexation in 2025 will be close to zero.
“In the current conditions, given the impact of railway tariffs on other sectors of the Ukrainian economy, it is expected that the increase in freight tariffs (if implemented) will cover only the most necessary minimum costs to ensure the operational stability of the Group. In particular, even in the case of its implementation, it is not expected that such an increase in tariffs will provide sufficient cash flows,” the document says.
As reported, the Fitch Ratings agency at the end of August raised the long-term issuer default ratings (RDE) in foreign and national currencies of UZ and its Eurobonds by $894.9 million to “CC” from “C”.
The agency noted that the payment of $594.9 million in July 2026 (almost 50% of UZ’s debt) and $300 million in July 2028 (24%) creates a high refinancing risk for the company due to very limited access to financing markets. Fitch at that time did not see how the company intends to finance the 2026 payment, and reminded that Ukrzaliznytsia should resume deferred payments of coupon income in January 2025 after obtaining the right to postponement in January 2023 from bondholders.
