Crux (#12 December 2012)

Financing of Ukrainian Business in 2012. Findings

The outgoing year has been dramatically complicated for Ukrainian businesses in terms of attracting finance. Ukrainian banks offer rather expensive money, while European banks are involved in to continued troubles of the Eurozone.

The situation on international capital markets did not enable Ukrainian corporate borrowers to arrange IPOs or placing Eurobonds. Thus, the anticipated Ukrainian IPO boom was once again postponed for more favorable times.

At the very end of the year our “financial” panel examines shortages and opportunities, regulatory efforts and forecasts about the near future.

Nataliya Drozdova, lawyer, Salkom

Nataliya Drozdova, lawyer, Salkom

Did the volume of bank loans change compared with 2011? How can it be explained?

According to the National Bank of Ukraine’s data there is a noticeable upward trend in crediting of Ukrainian businesses in recent years. As of 1 January 2011 banks issued such loans totaling UAH 508,288 million. And as of 1 January 2012 the amount was UAH 580,907 million.

On 10 January 2012, the amount was already UAH 602,122 million. However, the increase in lending in the banking system as a whole can hardly be confirmation of the increasing volume in individual banks. At the same time, the decline of long-term loans in 2012 shows that even with the increase in total lending to Ukrainian businesses, banks are still unsure of the degree of their safety facing future risks (including political ones). The increase in lending to Ukrainian businesses in 2012 by the banking system as a whole could have been influenced by the following factors:

1) reduction of the total external debt of the banking sector under syndicated loans;

2) increased volumes of credit resources of the relevant banks, including the growth of attracted deposits, which, in its turn, indicate a gradual recovery of confidence on the part of depositors in the banking system;

3) the monetary and credit policies established by the NBU;

4) less problematic loans in banks portfolios.

Given the instability of the political situation in Ukraine, unfavorable investment climate, instability of global financial markets, uncertainty in the economy, we can predict a downward trend in lending in Ukraine, which will definitely have an impact on the profitability of banks.

Gabriel Aslanian, senior associate, Asters

Gabriel Aslanian, senior associate, Asters

How do you assess the lending terms for Ukrainian borrowers in the current year? What type of financing was more favorable: bank loans or issue of Eurobonds?

A UN world economy report issued in late 2011 pointed out the persistent weaknesses in the major developed economies related to problems left unresolved in the aftermath of the Great Recession of 2008-2009. The Ukrainian export-oriented economy still remains exposed to risks emerging globally. Thus, the domestic market has not seen plenty of good fund raising opportunities, in particular, due to high interest rates charged by local banks.

Despite the Ukrainian government’s Eurobonds breakthrough in mid-2012, activity by private issuers on international capital markets remained relatively low throughout the year. The enthusiasm of foreign investors has been significantly shaken by political instability in the Eurozone and unfavorable expectations for the euro. The increased cautiousness resulted in a reduction of capital flows for developing countries, such as Ukraine, and boosted the financing cost for local businesses. As a result of instability, the priorities of foreign lenders holding their business opportunities in Ukraine shifted from unsecured investments (such as Eurobonds) to secured lending in the form of syndicated loans and traditional bilateral loans extended at a higher cost. Many Ukrainian businesses had no option but to revisit their strategies on the basis of raising international capital.

The stringent financing conditions with private investors have increased the number of companies from the Ukrainian finance sector, farming business, alternative energy seeking cooperation with international financial institutions (such as the IFC and EBRD), which are present on a permanent basis on the Ukrainian market, usually offering the most competitive financing conditions.

Artem Shyrkozhukhov, associate, Avellum Partners

Artem Shyrkozhukhov, associate, Avellum Partners

What tools of debt financing were used by the Ukrainian corporate sector?

With Eurobond markets closed and bank lending significantly curtailed, 2012 has not been a particularly impressive year with opportunities for Ukrainian businesses to get debt financing. Only Ukrainian companies which are leaders in their respective sectors and have positive credit histories have been able to get access to syndicated lending this year. For example, Kernel, Milkiland, Metinvest, DTEK and Creative.

The most active segments of bank lending in 2012 has been export financing backed by export credit agencies (ECA). This year, the following ECAs have been active in providing their coverage for loans to Ukrainian borrowers: Atradius (the Netherlands), Euler Hermes (Germany), EKF (Denmark), SERV (Switzerland), EKN (Sweden) and Ex-Im Bank (USA). ECA-backed loans are relatively small, usually up to EUR 20 million. At the same time, such loans are often more preferable to Ukrainian borrowers because lenders are willing to accept less stringent security requirements (usually only a suretyship). International financial institutions (such as the EBRD and IFC) remained active suppliers of debt financing (or a combination of debt and equity financing) to Ukrainian businesses and we hope this trend will continue.

The Ukrainian domestic bond market has seen some activity this year as well. Several companies with established reputations made debut issues of their domestic bonds. For example, a UAH 200 million issue by LLC Burat-Agro (Industrial Milk Company Group) and a UAH 240 million issue of PrJSC Creative (Creative Group), all due in 2014. The growing trend is to have secured bond issues, most commonly by suretyship/guarantee in order to provide more comfort to investors.

Yulia Kyrpa, partner, Vasil Kisil & Partners

Yulia Kyrpa, partner, Vasil Kisil & Partners

What sectors of the Ukrainian economy can be expected to be (most) active on international capital markets next year? What main and alternative stock markets can be viewed as platforms for such offerings?

Despite some scattered signs of improvement in recent months, the world economic situation and prospects in international capital markets for 2013 continue to be challenging.

After a marked slowdown in 2011 and 2012, global economic growth is likely to remain tepid in 2013. It means the presence of Ukrainian companies in the international capital markets in the forthcoming year will remain below potential.

A number of opportunities for fundraising will depend heavily on the ability of the Ukrainian Government to reach a constructive dialog with the International Monetary Fund and resume cooperation with this institution. This compromise is extremely important not only because IMF loans are the cheapest available option, but also because maintaining cooperation with the IMF is a requirement for obtaining loans from the World Bank and macro-financial assistance from the EU.

In the alternative scenario (i.e. if no compromise is reached with the IMF), it will hardly be possible to maintain a stable exchange rate for Hryvnia (UAH) without applying any administrative measures, such as mandatory sale of 50% of foreign currency proceeds by Ukrainian exporters, or introduction of new taxes applicable to conversion of Hryvnia into hard currency or vice versa.

Obviously, all uncertainties relating to the UAH/USD conversion rate, as well as heavily regulated foreign currency market in Ukraine, are likely to increase anxiety of foreign investors and hinder the prospects for successful Eurobonds placements or IPOs to be made by Ukrainian companies. If a compromise is reached with the IMF, a positive impact on Ukrainian investment climate can be expected.

In 2013 we could anticipate the following companies to be active in the international capital markets: Galnaftogas (oil & gas), DTEK (power), Metinvest (steel & natural resources), Interpipe (machinery), Club of Cheese (food) and Naftogaz of Ukraine (gas). It is likely that the Ukrainian agricultural sector will remain attractive for foreign investors. There is a probability of Eurobonds issues by the most dynamic and successful Ukrainian banks and IPOs by booming IT companies in 2013.

According to forecasts, the LSE, AIM, WSE and NEW CONNECT will remain the most popular platforms for Ukrainian companies. It is not unlikely that few placements could be made on Asian platforms (e.g. Hong Kong stock exchange), as they could give access to a new pool of investors. The latter opportunity requires certain visibility of a Ukrainian company in the particular region where a planned placement is to be made.

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