Ukraine Counters Russian Cargo Grab With Bond-Sale Cash: Freight

Ukraine’s biggest transport companies are selling debt to revamp transport routes and win back cargoes from Russia, which has swiped a chunk of business from its neighbor by investing more in ports and inland links.

State-owned railway monopoly Ukrzaliznytsya sold $500 million of five-year debt at a 9.5 percent yield last week as it gathers funds for 13.7 billion hryvnia ($1.7 billion) of car and track upgrades this year. Road operator Ukravtodor may sell about the same amount, according to Alexander Valchyshen, head of research at Investment Capital Ukraine in the capital, Kiev.

Goods transit through Ukraine has plunged 39 percent since 2005 as shippers favored Russia over a nation that was once part of the Silk Road route and a fixture of Soviet-era commerce. While Russia plans to boost freight by a quarter by 2020, Ukraine must reverse a decade of under-spending to stem a loss of competitiveness, according to Maria Mikhaylenko, a principal at Roland Berger Strategy Consultants in Moscow.

“Russia, as well as other Black Sea nations such as Georgia and Romania, have been developing shipping capacity, causing Ukraine to lose cargo flows,” she said by phone. “Ukraine must widen narrow rail roads, upgrade stations and improve access roads to ports.”

The Crimea region of Ukraine, a country of 46 million people that lies between Russia and the 27-member European Union, featured on 14th-century Chinese maps as part of the Silk Road that carried goods between Asia and Europe. More recently, Russia sent half of its goods shipments via Ukraine and the three Baltic countries at the time of the 1991 Soviet collapse.

Russian Ports

Recently, its fortunes have flagged as Russia used the 2014 Winter Olympics in Sochi as a spur to overhaul infrastructure and boosted investment in terminals such as Novorossiysk Commercial Sea Port. The Russian government spent 17 billion rubles ($545 million) on ports last year and private investors added four times that amount, Aleksandr Davydenko, head of the Federal Sea and River Transport Agency, said March 1.

Ukraine’s decline continued in the first quarter as transit cargo volumes dropped 16.6 percent from a year earlier, the statistics office said May 17.

The country has a long way to go to improve its transport infrastructure, according to the World Bank, which said in a 2010 report that the chances of Ukraine becoming a regional logistics hub in the next five to 10 years appear “almost nonexistent.” It called logistics services “unreliable.”

Lost Competitiveness

“Although there have been reported investments, people haven’t really seen improvement on the ground,” Michelle Karavias, senior energy and infrastructure analyst at Business Monitor International, said this week by phone from London. “We’re bearish in our outlook for the road sector. Ukraine definitely lost competitiveness because of this transport network.”

The government is seeking to stop the rot, building a container terminal in the Black Sea resort of Odessa, upgrading the nearby ports of Pivdennyi and Illichivsk and developing its rail and road systems.

Ukraine will purchase 6,000 rail cars this year for 4.3 billion hryvnia and will spend 8.3 billion hryvnia to electrify 493 kilometers (308 miles) of tracks, Transport Minister Volodymyr Kozak told reporters May 15. Railroads carry 82 percent of all cargo, Ukrzaliznytsya data show.

Spending Plans

“When Ukrzaliznytsya gets the money, it will have plans how to spend it because the problems are numerous,” Kozak said in Kiev. The company also plans to renovate about 1,000 kilometers a year of tracks and replace 300 locomotives, according to the minister.

The yield on Ukrzaliznytsya’s bonds fell 2 basis points to 9.478 percent as of 12: 30 p.m. in Kiev, data compiled by Bloomberg show.

Ukraine needs 40 billion to 50 billion hryvnia a year for 10 years to bring roads to a satisfactory state, Ukravtodor’s Chief Executive Officer Yevhen Prusenko said May 20.

“We have a program for concession projects of 4,500 kilometers of roads,” he told reporters in Kiev. “We have an endless amount of projects and the state doesn’t have enough money.”

The World Bank agreed to lend state-owned Ukravtodor $450 million to improve the Kiev-Kharkiv highway and other roads, the lender said Oct. 11 in an e-mailed statement.

Companies including poultry maker Mironovskiy Hleboproduct SA and coal and power producer DTEK have joined the government in issuing Eurobonds and will probably sell more debt in the coming months, according to Goldman Sachs Group Inc.

‘Extremely Strong’

Ukrainian “corporate bond issuance has been extremely strong in recent months owing to abundant global liquidity and ultra-low G4 government rates,” the U.S. bank wrote May 16 in an e-mailed research note.

Fitch Ratings assigned a B- grade to Ukrzaliznytsya’s loan-participation notes, six levels short of investment status and one step below Ukraine’s sovereign rating. If required, “extraordinary support from the central government would be forthcoming” to service the debt, it said May 2 in a statement.

Standard & Poor’s yesterday raised Ukrzaliznytsya’s rating to B, five steps below investment grade, from B- as proceeds from the bond sale “enable the company to reduce its reliance on short-term debt.”

The government sold $1.25 billion of 10-year Eurobonds with a 7.5 percent yield last month. The yield, which exceeded 8 percent in late April, was 7.302 percent today.

As far as Ukravtodor is concerned, it’s premature to talk about selling debt, though “additional financing is needed,” Prusenko said. He added that Ukraine is seeking to boost the quality of transport services to something more akin to that in the EU, with which the government is pursuing a free-trade accord.

“We would like to do everything like in Europe,” he said. “But this is going to take time and resources.”

Before it's here, it's on the Bloomberg Terminal.