The FINANCIAL — Fitch Ratings says in a new report that the negative sector outlook for rail companies in the former countries of Soviet Union (FSU) reflects continued pressure on freight transportation volumes and rates and the impact of weak local currencies.
This is due to weak market fundamentals and increasing competition from other means of transport, especially for crude oil transportation. The impact of weak local currencies will vary, depending on companies’ funding strategies and applied tariffs.
Prospects of elevated inflation across the region will put further pressure on rated transport companies’ margins. The ability to cut costs will be key to supporting margins and cash flows. Failure by the companies to maintain leverage below negative rating guidelines may result in the revisions of Outlooks or negative rating actions, particularly for companies that are not credit-linked to their government.
Most of the FSU rail companies’ credit metrics are near or slightly over their current negative rating guidelines. Continued weak market fundamentals in 2016, with an increase in interest rates, would limit the potential for improvement in their credit profile.