Fitch says Ukrzaliznytsia bond restructuring meets distressed debt swap criteria

Fitch Ratings says it considers the debt restructuring terms agreed by the State Administration of Railways Transport of Ukraine's (Ukrzaliznytsia) and a creditor committee would meet its distressed debt exchange (DDE) criteria.

In accordance with Fitch's criteria, a DDE is deemed to have occurred (among others) if a restructuring imposes a material reduction in terms (including extension of maturity) compared with the original contractual terms of an entity's financial obligations, Fitch said in a statement.

On December 9 2015, Ukrzaliznytsia announced it had agreed the restructuring terms for its $500 million eurobond with the creditor committee. The eurobond is structured via Shortline Plc's loan participation notes, for which Ukrzaliznytsia is a guarantor. The terms of restructuring include a maturity extension to September 15, 2021, from May 21, 2018; coupon step-up to 9.875% from 9.5%; and an amortization schedule of principal with 60% of the principal to be repaid in 2019, 20% in 2020 and 20% in 2021.

Fitch says that the coupon step-up does not fully compensate the extension of maturity so it considers that its DDE criteria are met.

Completion of the DDE typically results in a downgrade of the Issuer Default Rating (IDR) to Restricted Default (RD). Shortly after the DDE is completed, Ukrzaliznytsia's IDR will be re-rated and raised to its performing level, which is likely to be still in the low speculative grade.

Fitch expects completion of the restructuring in late February/early March 2016, which will be followed by respective rating actions.

The agency continues to view Ukrzaliznytsia as a credit-linked public-sector entity (PSE) to its sponsor, Ukraine (CCC/C/CCC) as per Fitch's PSE rating criteria. Fitch understands that part of the issuer's foreign currency debt was included in the restructuring negotiations being pursued by the national government, suggesting ongoing linkages. However, the distressed situation of the issuer and its sponsor has led to a removal of the rating equalization.

Ukrzaliznytsia's foreign currency IDR is presently two notches below the sovereign's.

The ratings of Ukrzaliznytsia and Shortline Plc are as follows:

State Administration of Railways Transport of Ukraine

— Long-term foreign currency IDR 'C';

— Long-term local currency IDR 'RD';

— National Long-term rating 'RD';

— Short-term foreign currency IDR 'C'.

Shortline Plc

$500 mln LPNs (ISIN XS0934134312, US825262AA68) Long-term foreign currency rating 'C'.