Expert Opinion (#09 September 2012)

A Lawyer’s Take on Finance Opportunities for Ukrainian Business in 2012

Glib V. Bondar, Artem V. Shyrkozhukhov

Finance is the bloodstream for growth of any business. Cut it and, unless a business sits on a big pile of cash, growth is significantly curtailed. The second half of 2011 and most of 2012 were not particularly impressive as to the opportunities for Ukrainian businesses to raise finance. Showing some life in 2011, international capital markets completely closed down for Ukrainian businesses and banks lost or significantly restricted their appetite for Ukrainian risk in 2012. However, excessive dwelling on the negative side of things, particularly those beyond one’s control, is counterproductive.

This article discusses what has been going on in the corporate finance market from the perspective of what we can all learn from this. We will also look at some of the positive legal developments that have occurred during the past year and give some suggestions for changes to help Ukrainian companies get better access to financing in the future.

Capital markets

Positive dynamics for new IPOs and Eurobond issuances of Ukrainian businesses in the first six months of 2011 dropped dramatically midway through the year. Since then, capital markets have remained dormant. The uncertainties about the economy at home and abroad do not offer much hope for a fully-fledged reopening of the capital markets for Ukrainian businesses this year either. However, it does not seem to be all doom and gloom and there is already some small glimmer of hope that there will be some activity on the capital markets front either later this year or in 2013.

This time of crisis and uncertainty is precious and some businesses have already grasped a great opportunity to get to grips with preparatory work in time for when the capital markets (sooner or later) open their doors for Ukrainian business.

It is important that each business sits down and re-evaluates various pros and cons of doing an IPO or a Eurobond issue rather than making a hasty decision when the market is in a rush.

In the past, many companies approached IPOs and Eurobond issues not fully prepared in terms of having the proper corporate structure as well as documents and financial records for due diligence and audit in order or even knowing their own problems. The sooner the company starts putting its house in order the better. Being organised on every front will save a lot of time which may prove to give the edge that a particular capital markets project needs to move at the desired speed and eventually to succeed when all the companies who are now thirsty for financing start falling over each other to get their deals done when the markets open.

In times when international capital markets are still closed, the market for Ukrainian domestic offerings is something Ukrainian businesses start turning their attention to.

The Ukrainian market for corporate bonds is still very limited and less liquid compared to Eurobond markets. Ukraine lacks big institutional investors who are ready to buy securities to push the market forward, such as pension funds in Poland. However, it is possible for companies with established reputations to raise short-term medium-size financing of up to USD 50 million.

The growing trend is to have secured bond issues, most commonly by suretyship/guarantee in order to give more comfort to investors.

Doing a domestic offering deal usually throws up issues that do not normally arise in deals abroad. Despite substantial efforts of the Ukrainian securities regulator resulting in visible progress for the last two years, the Ukrainian securities market in general is still underdeveloped and a lot needs to be done by Ukrainian legislators and the Ukrainian Securities Commission to further reform Ukrainian legislation to make it more flexible and investor-friendly. For example, in the absence of the concept of a “trustee” in Ukrainian securities law similar to that existing under English law, such matters as the organisation of decision-making among holders of securities, taking security and others come to the fore. Although even under current legislation with some careful preparation these issues can be manageable, it is important that legislation adopts some concept of a security agent (trustee) for securities issues which will significantly improve the attractiveness of domestic bonds to investors.

Lastly, we cannot but mention the fact that during the past year, the Ukrainian Securities Commission took on board a lot of issues which had been shelved for a good number of years. The regulator has pushed for stricter securities market regulations (e.g. on insider dealing, advertisement, etc.) and is now working on a pilot project to allow listing of Ukrainian securities on foreign exchanges, admission of foreign securities to Ukrainian market, etc. These efforts can only be warmly welcomed and strongly encouraged.

M&A — private equity

In 2011, the M&A/private equity side of corporate finance saw a slight upward shift, but the “second wave” of the global financial crisis in 2012 brought some downward correction. Although there have not been any largescale M&A deals, there were many small and medium size deals. From our perspective, agricultural and food processing sectors were among the leaders. Most of the deals were part of the overall trend of asset consolidation and, on the other hand, selling off non-core assets. Recently, we have noticed a new trend in commercial real estate with the selling of business and commercial centres on the rise. We are also seeing some notable exits of some foreign banks which entered when the Ukrainian banking market was at the top.

Ukraine offers high return on investment (with high risk, however) and a lot of companies with high growth potential. Some companies, which did not succeed to attract capital through IPOs or Eurobonds in 2011 but which continue to experience the need for additional capital, consider entering into joint venture arrangements with prospective investors, more with private equity fund and fewer with strategic investors.

Even though Ukrainian corporate law has made a significant step forward with the adoption of the new Act On Joint Stock Companies and implementing regulations, as before, most Ukrainian M&A deals continue to be done under English law. English law gives a choice of legal instruments that are currently unavailable (or not easily adaptable) in Ukraine. English law also offers both, flexibility because it encompasses virtually every business situation, and stability as it is not prone to complete overhaul or abrupt changes of rules that have worked perfectly well for many years. English courts and arbitration tribunals also offer the highest standards for dispute resolution, whereas for Ukrainian courts this is still a long-term goal to be aspired to.

The Ukrainian Securities Commission and other regulators continue working on improving Ukrainian corporate legislation as well on removing some of the unnecessary red tape (e.g., simplification of registration and winding-up procedures, use of corporate seal, etc.). It is definitely a welcoming fact that these efforts are taken and we hope that many of these positive developments will see the light of day later this year.

Bank lending

Currently, Ukrainian borrowers have limited access to banking and credit facilities due to the situation in the global financial markets and uncertainty in Europe (e.g. the sovereign debt crisis), resulting in European banks being very cautious about taking credit risks, and a lack of readily available local money supply from Ukrainian banks. Only Ukrainian companies who are leaders in their respective sectors and have a positive credit history were able to get access to bank lending last and this year.

One of the most active segments of bank lending for the past two years was and continues to be the ECA-backed export financing. On the one hand, in light of the ongoing recession in some of the EU countries, European manufacturers are looking for new markets to export their technology. On the other hand, Ukrainian businesses are very keen on upgrading their outdated technologies to continue growth but often lack readily available cash to do that.

ECA-backed loans are relatively small, usually of up to EUR 20 million. At the same time, such loans are sometimes more preferable to Ukrainian borrowers because lenders of such loans are willing to accept less stringent security package requirements (usually only a suretyship) compared with those in syndicated lending. In 2011-2012, 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.

In recent years, many Ukrainian borrowers have faced problems with compliance with certain currency control requirements, particularly with the maximum interest limitation. The maximum interest rates that are currently established by the NBU are too low and do not properly reflect difficult market conditions. The cost of credit increased globally, let alone for Ukrainian companies, yet maximum interest rate limitations set by the NBU remain the same. Because of this hurdle, the structures of many deals had to be changed in order to make the interest rate and other payments that exceed these limitations payable offshore.

As a result, borrowers have to incur additional time and financial expenses. It is, therefore, recommended that the NBU periodically revises the maximum interest rates limitations against at least coupons of Ukrainian sovereign bonds.

On a positive note, the NBU’s recent activity resulted in easing some of the strict currency control regulations. One of the most important recent developments is the revision of rules for registration of cross-border loan agreements, which starting from 9 November of this year will become simpler. Last year, the NBU clarified certain issues with individual licensing requirement for payments under suretyship agreements.


The second wave of the global financial crisis cut most of the opportunities for Ukrainian businesses to raise finance abroad. However, despite the fact that Ukrainian companies continue to show a resilient desire for growth and continue searching for various opportunities to finance it. In light of the closing of capital markets, opportunities for some work on the domestic front and in M&A emerged. When syndicated lending is not readily available, Ukrainian companies take a targeted approach to obtain trade finance or finance from international financial organisations. It is important that Ukrainian regulators recognise this fact and do everything possible to help Ukrainian business by removing unnecessary obstacles with no significant policy rationale. We hope that this positive trend will continue as the situation globally and at home slowly but steadily improves for the better.

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