Corporate Finance: Findings for 2013

The first quarter of 2013 appeared to be really hot for the corporate issuers of Eurobonds. The big businesses that had to refinance their debts had used the favorable situation on international corporate markets. Despite the reforms initiated in the regulation of domestic bond markets, corporate domestic bonds were not popular over the outgoing year.

Foreign lending remained another source of finance. ECA-backed finance was definitely seen in the course of deals, while it is a complicated task for finance seeking businesses to be attractive for the EBRD or IFC.

As for the equity capital option, the specific regulation raises concerns.

Please, describe the trends of banks’ lending to Ukrainian businesses in 2013. What is the current value of loans for Ukrainian borrowers?

Iaroslav Iarovyi, senior associate, ENGARDE

Positive tendencies in the volumes of bank crediting in Ukraine were formed in 2013. Since the beginning of 2013 the loan portfolio, granted for legal entities, has increased by 8%, which is essentially more than double the increment for the same period last year (4.4%). 

The banking sector especially is showing positive tendencies in loan growth in the national currency, which has shaped this autumn. In September the majority of the increment of legal entities crediting was for loans in hryvnias. The increase in hryvnias loan portfolio was equal to UAH 11.9 billion, whereas in foreign currency — only UAH 1 billion. At the same time, the total volume of loans in hryvnias granted for the real sector of economy has risen since the beginning of 2013 by UAH 25.4 billion, and in foreign currency — by UAH 17.9 billion.

It should also be noted that there is the reduction of loan rates in national currency in the real sector of the economy. According to the National Bank of Ukraine, the weighted average interest rate under loans for economic entity in national currency in October 2013 has fallen to 14.3% from 16.7% in December 2012.

Yet, in spite of the positive tendencies in the issuing of loans, the real sector of the economy requires a major increase in the volume of crediting volumes and reduction of interest rates. As of today business needs stable programs of bank crediting and foreseeable actions from the National Bank of Ukraine.

What was the situation with syndicated lending in 2013? What were the terms of financing?

Oleksandr Vygovskyy,attorney at law, Ilyashev & Partners

In general, the syndicated loans market in Ukraine in 2013 remained approximately at the same level  compared to the previous year. An average syndicated loan was provided to a Ukrainian company by international and local banks (generally up to 8-10 syndicate members) for 3-5 years in USD. Such loans are normally structured in several tranches and provided at a floating rate with reference to LIBOR plus margin depending on the borrower’s profile and loan conditions. The recipients of syndicated loans customarily included Ukrainian mining companies, financial institutions and agricultural companies having good economic prospects from the creditors’ standpoint. The intended purposes of the syndicated loans consisted of the purchase of raw materials and equipment, modernization of manufacturing facilities, trade/pre-export financing, refinancing of loan portfolios and working capital facilities.

Traditional obstacles to further development of the syndicated loans market are associated with the liquidity crisis, low capitalization of Ukrainian banks and instability of the financial system, as well as inadequacy of the legislative regulation of syndicated loan transactions. The contraction in loan financing for Ukrainian borrowers during the last years, relatively short terms and high cost of lending can also be explained by currency risks and overall downgrade in Ukraine’s international ratings, as well as political situation in the country.

The first six months of this year was quite favorable for Ukrainian issuers of Eurobonds. What was the reason? What legal structures of issues were used? Who purchases Eurobonds of Ukrainian issuers?

Nazar Chernyavsky,partner, Sayenko Kharenko

One of the most important factors affecting global capital markets at the beginning of 2013 was the new phase of QE program initiated by the US Government. The excessive liquidity resulting from those measures has reached the Ukrainian market as well, and most of the Ukrainian issuers who needed financing have finally seen a window to enter international capital markets. However, only the largest (and more experienced) issuers were able to benefit from it, as they were able to prepare all documentation within the tight timeframe. After the window closed in April 2013, the political and economic environment in Ukraine prevented our companies from the new issues in autumn when global markets revived again.

Despite the expectations of some experts about potential changes in the structures for LPN issues due to the provisions of the Tax Code adopted in 2012, major structures remained the same. In particular, some issues are still done by foreign holding companies of Ukrainian businesses, and some issues are structured through orphan SPVs. At the same time, new issuers have been considering the use of a “double-decker” structure to avoid potential arguments of the tax authorities that the beneficial ownership requirement is not being met.

Traditionally, a significant part of Ukrainian Eurobonds is purchased by Ukrainian or CIS investors acting through their offshore investment vehicles, as they are well familiar with the country risks. The rest is placed among big European private and institutional investors. However, this year underwriters have seen growing demand for Ukrainian instruments from certain US investors, who were not that active in this market before.

How would you evaluate the prospects of the domestic bond market? Which borrowers can attract such funding and what are its advantages/disadvantages?

Artem Shyrkozhukhov, associate, Avellum Partners

Bonds make up the lion’s share of the Ukrainian stock market. The vast majority of all bonds on the market are sovereign domestic bonds. With the unfavourable situation on international capital markets, Ukraine has been very active with borrowings on the domestic market mainly in order to continue financing the state deficit. Unlike sovereign domestic bonds which are considered to be more liquid securities, corporate domestic bonds still enjoy less popularity (although this segment is growing). As in previous years, corporate domestic bonds were issued by well-established Ukrainian companies with solid credit ratings. For these borrowers the Ukrainian bond market offers an opportunity to borrow more money at a lower interest rate and with fewer strings attached than they would otherwise get if they went for a bank loan. At the same time, the Ukrainian bond market is still a far cry from foreign bond markets, both in terms of its size and investor protection mechanisms.

The National Securities and Stock Market Commission has been active in its efforts to reform regulation and infrastructure of Ukrainian stock market, turning some of its attention this year to the bond market. We have seen proposals to introduce bondholders meetings, some mechanisms to protect bondholders in case of default, etc. This is definitely to be welcomed and encouraged as many of these questions have been discussed for years. However, it is unlikely that these efforts, even if successful, will give market the expected boost. The macroeconomic factors are likely to dominate the picture in 2014 as is the case this year.

What are the current problems of attracting private equity in Ukraine?

Maksym Uslystyi, senior associate, AstapovLawyers ILG

Non-public offerings were always popular in Ukraine due to relative simplicity and imminent accessibility in contrast to other funding rounds and financing vehicles. There are, however, some major statutory and regulatory obstacles preventing private placements from becoming coherent for foreign investors. First and foremost are the theoretical difficulties in “putting together” the private placement itself with the financial and legal standing of the issuer. Unlike common law jurisdictions, the provision of broad warranties and representations in respect of the issuer, especially in relation to its financial standing, title to property, reporting requirements, corporate capacity, etc., is likely to be practically unenforceable. This is because of the common approach whereby the shares being acquired are deemed to be the only transaction subject, whilst the issuing company itself and its “pig in a poke” often held separate, causing the investor to incur additional risks. This situation shall continue unless and until the business and legislator comprehends that the commercial essence of such transactions implies the acquisition of equity in the capital of the company, instead of a simple sale of stock. The practicability of investor risks is directly dependent upon the future financial outcome of the issuer, especially in the case of private investments. 

Secondly, this is an issue of multiple corporate governance issues remaining unsolved. Instead of a simple infusion of capital, a potential investor seeking for proper investment facilities has to be sure that issuer’s value shall increase. The investment risks (especially in case of venture investments, small and emerging business) should be controllable.  For this purpose, investors are often seeking the possibility to actively participate in the issue’s business. The latter may be a challenge in Ukraine, considering the inflexible approach of local corporate laws and the absence of some practical concepts. Those are, for instance, matters related to the impossibility of increasing the threshold for adopting the GMS reserved matters, amending quorum, granting veto rights to designated shareholders and enforceability concerns of shareholders agreements in general.

What are the main problems of equity management in Ukraine?

Bohdan Shapoval,partner, JURIMEX

Transformation of the national economy of Ukraine, which started in the 1990s, led to the introduction of the joint stock form of ownership in the country. Within twenty years the system of share capital management was improved. But there are problematic matters in the process of its development, which reduce positive dynamics to a certain extent. Such limits may be divided into two groups: legal and financial. 

Legal ones include factors such as insufficient legal protection of minor shareholders, portfolio investors as well as absence of efficient remediesof rights of the mentioned participants. Despite adoption of the On Joint Stock Companies Act, and taking into account the experience of developed countries, it needs improvement.

Conditions on the financial market of the state are important for development of corporate relations and establishment of share capital management system. A developed financial market offers an investor a wide spectrum of opportunities to protect his own interests. At the same time, insiders obtain the possibility to attract additional capital to finance business-projects.

Taking into account the above mentioned a joint stock company is, in its essence, still considered a private enterprise. In this case the advantages provided by the joint stock legal form are emission source of financing for major participants and object for profitable investment for investors.