Hedge fund creditors, including VR Capital, are holding firm against a proposed second restructuring of Ukrainian Railways’ international bonds, demanding tariff reforms before agreeing to any new deal, according to a report by Bloomberg.

The state-owned rail operator, pivotal to Ukraine’s war logistics and economy, is facing growing resistance from bondholders as it grapples with more than $700m in bonds maturing next year.

While Ukraine has secured broad investor support for its sovereign and state-owned enterprise debt revamps since Russia’s 2022 invasion, Ukrainian Railways’ bondholders are signalling a harder stance. The report cites unnamed people familiar with the matter as saying that hedge funds are refusing to engage in further restructuring talks unless the government permits a long-delayed cargo tariff hike – deemed crucial to stabilising the company’s deteriorating financial position.

Last year, Ukrainian Railways proposed a 37% freight tariff increase, but government approval remains pending. Bondholders argue that without additional revenue from higher tariffs, any restructuring will result in deeper haircuts and reduced recoveries.

VR Capital, a specialist in distressed sovereign and quasi-sovereign debt, reportedly holds a significant stake in the 2026 notes. The hedge fund also has exposure to other Ukrainian debt instruments, including GDP warrants and bonds from Ukrenergo, the state power grid operator currently undergoing its own restructuring.

Ukrainian Railways recently appointed Rothschild to advise on its debt options. In December, bondholders rejected a proposal to defer $83m in interest payments. The company ultimately agreed to make the payments but warned of "significant market and liquidity stress."

With the war now in its fourth year, the railway’s financial pressures have deepened due to falling cargo volumes, rising energy and labour costs, and lagging state support. Ratings agency Fitch has flagged a probable default by 2026 due to operational uncertainties and upcoming maturities.

The company’s 2026 bonds are trading just below 83 cents on the dollar, down in recent months.