The international rating agency S&P Global Ratings has upgraded the long-term credit rating of JSC "Ukrzaliznytsia" (UZ) and its eurobonds from "CC" to "CCC" following the company's coupon payments on January 9 and January 15 for eurobonds maturing in 2026 and 2028.
"In January 2025, JSC "Ukrzaliznytsia" made a coupon payment on eurobonds maturing in 2026 and 2028, allowing the company to avoid default on its bonds... The ratings of JSC "Ukrzaliznytsia" have been raised to "CCC-" based on coupon payments; the outlook is "negative," - states the announcement on S&P's website.
S&P indicated that the risk of default for UZ has decreased following the coupon payment, but has not disappeared, given the significant liquidity pressure the company faces due to the war in Ukraine and the high uncertainty regarding the financial capability of the Ukrainian government to provide further support to the company.
It was noted that the negative rating of "CCC" reflects high risks associated with UZ's debt servicing payments.
The decision by UZ to make the coupon payments in January was based on the belief that authorities would approve a tariff increase, according to S&P.
"Although UZ's liquidity has significantly worsened, we understand from the company’s management that there is now a strong likelihood of a tariff increase in 2025, which could somewhat improve UZ's ability to generate cash flows, although a final decision on the tariff increase has yet to be made," the rating agency stated.
S&P expressed concern that while a tariff increase could enhance UZ's ability to generate cash flows, it might also lead to a reduction in the cargo base for transportation, as "not all customers will be willing to pay higher tariffs."
S&P suggests that UZ may need to restructure its payment schedule or declare a default on its debt payments within the next 6-12 months, as without additional government intervention or significant cuts to operating expenses, the current liquidity will be exhausted within that timeframe.
The agency reminded that in 2025, UZ's coupon payments will be low - around $45 million, while a major payment for the company is due only in July 2026 - $703 million.
The S&P announcement noted that the agency could downgrade UZ's rating if it determines that the company is unable to make debt payments according to the repayment schedule over the next 6-12 months.
It was previously reported that in January, UZ announced its intention to pay coupons due in January on its eurobonds totaling $594.9 million maturing on July 9, 2026, and $300 million maturing on July 15, 2028. Before this, the company stated that it decided to capitalize interest on the 2026 eurobonds at a rate of 8.25% amounting to $108.28 million, increasing the total of this issue to $703.18 million, while for the 2028 eurobonds at a rate of 7.875% the amount was $51.9 million, raising the total to $351.9 million.
On December 16, 2024, UZ, as it did two years earlier, initiated a procedure to seek the consent of eurobond holders for deferring coupon payments due in January and July 2025 until January 2026, but was unable to obtain their agreement. The need to extend the moratorium on payments for another year was explained by the significant decrease in cargo transportation volumes in the second half of 2024, a sharp rise in costs due to inflation caused by the escalation of military aggression, and a high degree of uncertainty surrounding the potential approval of tariff increases.
Assistance in the effort to provide support to "Ukrzaliznytsia" was offered by Dragon Capital and J.P. Morgan Securities.
Following this, the international rating agency Standard & Poor’s downgraded "UZ" from "CCC+" to "CC". S&P Global Ratings also assigned the company a "CC" rating.
As reported, in 2024, UZ increased its cargo transportation volume by 17.9% compared to the previous year, reaching 174.9 million tons. The company estimated its EBITDA for the fourth quarter of 2024 at around 1.0 billion UAH after a decline to 3.3 billion UAH in the third quarter of 2024 from 6.6 billion UAH and 6.9 billion UAH in the first and second quarters, respectively. As a result, the company expected its net loss for 2024 to be between 1.5 billion UAH and 2.5 billion UAH, depending on exchange rates and related expenses, as well as the consequences of Russian attacks.
At the end of 2024, UZ prepared proposals for a 37% increase in cargo transportation tariffs in 2025. The final decision is to be made by the Ministry of Community and Territorial Development of Ukraine.