OREANDA-NEWS. Brunswick Rail Limited (the "Company"), and its subsidiaries (together the "Group") announced today that it is undertaking a strategic review of the Group's capital structure in light of continuing deterioration in the Company's operating environment due to a market wide decline in lease rates and the impact of Rouble devaluation which has caused many of the Company's clients to transition away from US dollar based contracts. To assist in this process the Company has engaged Houlihan Lokey (Europe) Limited ("Houlihan Lokey") as financial advisor. The review will be focused on the Group's balance sheet and is not intended to impact the Group's employees, partners, customers, suppliers or trade creditors.

The industry environment in which the Company operates remains severely depressed and the downturn is expected to last for the foreseeable future due to the lingering effects of railcar overproduction and inadequate write-offs in recent years, as well as the impact of falling rail transportation volumes. Since the Company's peak operating performance in 2012, EBITDA has declined from $257 million to $86 million on an LTM basis up to 30 September 2015 and is expected to be between $73 and $77 million for full year 2015. During this time, the Gondola daily spot rates decreased from $50 to less than $7 and the Rouble has declined from 30 to 72,92 per dollar. The Rouble devaluation has resulted in customers shifting contracts from US Dollars to Roubles and the expectation is that by the end of 2017 the Group's revenues will be more than 90 percent Rouble denominated. The effect of this decline in operating performance in US Dollar terms has meant that the Group's ability to sustain its current capital structure, particularly the ability to maintain significant US dollar denominated debt, has been impaired.

The Company has sought to mitigate the impact of these market trends by focusing on clients with high payment discipline and credit quality, optimizing the fleet to maintain 100 percent utilisation, cutting capital expenditures, overheads and direct costs. The Company has also been actively managing its bad debt expenses. Nevertheless, although the Company continues to take proactive action aimed at improving performance in the current lease rate environment, transportation volumes and lease rates are expected to remain depressed and could decline further.

Russian transportation volumes are closely linked to the performance of the underlying economy, which is expected to decline 3.8 percent during 2015. The current IMF forecast is for continued deterioration in 2016 with a gradual return to growth in 2017. Growth rates are expected to be materially impacted by the level of oil and commodity prices, which are forecast to remain at depressed levels. As a result, Russian transportation volumes are expected to remain subdued. Moreover, even in the event of a return to growth, railcar overproduction and excess capacity on the part of railcar producers is expected to create an effective ceiling for railcar prices and lease rates into the foreseeable future. 

In light of these factors, Management believes that it is in the best interests of all stakeholders to address the current capital structure in a manner that reflects the fundamental and permanent changes to the Group's operating environment and business model.

In addition, as previously disclosed, the Company has continued to work with its lenders under the syndicated facility to address any potential breaches. As the facility matures in July 2016, the Company determined it was in its best interest to pursue a refinancing option. Accordingly, in December 2015 OOO Brunswick Rail and Alfa-Leasing LLC signed a term sheet for the provision of up to RUR 4 billion of financing pursuant to two new sale and leaseback facilities (with respect to 3,398 and 2,700 railcars, respectively). 

As part of the above financing plan, on 28 December 2015 OOO Brunswick Rail entered into a first agreement with Alfa-Leasing LLC for the provision of RUR 2 352 877 500 (incl. VAT) of financing under a new sale and leaseback facility. Under this new facility, OOO Brunswick Rail will have the ability on or before 17 January 2016 to enter into sale and leaseback arrangements with Alfa-Leasing LLC in relation to 3,398 railcars which are subject to pledge under the syndicated facility. The Company presently intends to use the proceeds of the sale and leaseback facility together with the second leaseback arrangements for 2,700 railcars mentioned above (which is presently being negotiated), and, to the extent needed in addition to that, own cash, to effect a full repayment of its existing syndicated facility. Closing of the sale leaseback transactions will be subject to customary conditions precedent for transactions of this nature.

Pursuant to the sale and leaseback transactions, OOO Brunswick Rail will simultaneously lease back any railcars sold. The leases will have a term that ends in January 2018. OOO Brunswick Rail will have an option to repurchase leased railcars at any time during the lease term at a price determined in the finance lease agreement for each month of the lease term.

The Company is also in discussions with other institutions to provide a domestic Rouble facility to facilitate a transaction with its stakeholders.

As part of the capital structure review, the Company is launching a noteholder identification process in order to obtain input from noteholders. The information gathered through this exercise, subject to applicable laws and regulations, will be treated in the strictest confidence and kept within the Group and its professional advisers, and will be used by members of the Group only to contact noteholders. Noteholders are encouraged to contact Houlihan Lokey with regards to any questions that they may have on the process at their convenience.

About Brunswick Rail:

Brunswick Rail is a private railcar operating lessor providing freight railcars to large corporate clients in Russia. Established in 2004, Brunswick Rail currently owns a fleet of ca. 25.7 thousand railcars (as of 30 June 2015), which represents approximately 2% of the total Russian railcar fleet.