On May 4, 2016, S&P Global Ratings lowered its long-term corporate credit rating on the Far-Eastern Shipping Co. PLC (FESCO) to “CC” from “B–”. At the same time, S&P lowered the issue rating on the existing senior secured notes to “C” from “B–”. S&P placed the corporate credit and issue ratings on CreditWatch with negative implications, the rating agency reported.

The downgrade reflects S&P’s view of FESCO as currently highly vulnerable to the nonpayment of its debt obligations. As a result of its eroding liquidity position, FESCO announced that it has hired external advisors to review its capital structure. As part of the restructuring exercise, the company is considering deferring its coupon payment on the outstanding bonds of about USD36 million.

FESCO continues to face a challenging macroeconomic and political environment, with falling transportation volumes, exacerbated by the devaluation of the rouble, which has pressured earnings in relation to the company’s largely U.S. dollar-denominated debt. About half of FESCO’s earnings are not denominated in U.S. dollars.

FESCO’s revenues fell by about 40 percent, and its EBITDA (earnings before interest, taxes, depreciation, and amortization) by 30 percent in 2015, and S&P foresees no significant improvements in the short-term because overall economic prospects and consumer confidence remain uncertain in Russia.

While FESCO has not provided any details on the conditions of the possible debt restructuring, including its scale or what the company’s next steps would be, S&P is concerned about the entity’s overall current liquidity and its ability to service its debt according to the original conditions. The company faces about USD52 million of debt service charges to end-June 2016 and about USD120 million in the next six months thereafter, while its operational prospects remain uncertain, domestic currency weak, and its cash position is rapidly diminishing.

The CreditWatch placement reflects the probability that S&P will downgrade FESCO if the company fails to pay its financial obligations on time and in full, if it undertakes a debt restructuring that S&P considers to be distressed, or enters into a standstill.

The Far-Eastern Shipping Company is a large Russian shipping company, a structural unit of the FESCO Transportation Group.

The IFRS net loss of FESCO, as well as its subsidiaries and affiliates, for 2015 went up 85.74 percent to RUB11.525 billion (USD0.18 billion) from RUB6.205 billion (USD0.10 billion) the year before. Revenues decreased by 2.67 percent to RUB41.645 billion (USD0.65 billion) from RUB42.787 billion (USD0.67 billion). Profits from operations stood at RUB3.639 billion (USD0.06 billion), against a loss of RUB1.47 billion (USD0.02 billion) in 2014. Losses before taxes increased by 76.91 percent to RUB10.441 billion (USD0.16 billion) from RUB5.902 billion (USD0.09 billion).

According to AK&M Information Agency’s DataCapital information retrieval system, the RAS net loss of FESCO for 2015 decreased 16.58 times to RUB457.049 million (USD7.11 million) from RUB7.576 billion (USD0.12 billion) the year before. Revenues increased by 50.48 percent to RUB3.974 billion (USD0.06 billion) from RUB2.641 billion (USD0.04 billion), even as sales losses decreased 4.34 times to RUB179.467 million (USD2.79 million) from RUB779.719 million (USD12.12 million). Losses before taxes went down 15.21 times to RUB464.083 million (USD7.22 million) from RUB7.057 billion (USD0.11 billion).