10 years ago words "Eurobonds", "IPO", "syndicated loans", etc. were know in Ukraine for most only to the experts and the relevant instruments were very rarely used to finance national businesses. However, rapid development of Ukrainian companies in 2002-2007, permanent need for the funds to enter new markets and implement new projects, caused the demand for the new external sources of financing. This became especially crucial in the course of the financial crisis.
Financial Instruments: Facts and Trends
What are the most commonly used instruments used by international creditors to finance Ukrainian companies? Large companies usually attract funds through international loans, including syndicated loans, issue of Eurobonds and IPO. According the analysts within the period of 2005-2010 Ukrainian companies managed to attract about USD 3.2 billion on the foreign stock exchanges. The commonly chosen platforms for placement are AIM of the London Stock Exchange, Deutsche Borse (Frankfurt Stock Exchange) and Warsaw Stock Exchange (WSE). The last exchange is especially popular with Ukrainian agrarian companies. To add, experts consider placements of Ukrainian companies on the WSE as the most effective. For instance, in 2007 Kernel Group, one of the major agro-companies in Ukraine, undergone IPO on the WSE and attracted about USD 220 million and in 2010 about USD 81.4 million through SPO on the same platform.
Mid-sized companies, which cannot afford IPO or Eurobonds issue, attract funds via international loans, including loans through sale of shares under obligation of the borrower on subsequent buyout.
In 2010 a Ukrainian mid-sized company AGROLIGA successfully completed private placement on the NewConnect, an alternative trading platform of the WSE, and attracted USD 1.3 million. This was the first Ukrainian company to enter this platform but experts believe that in a few years NewConnect will become the leading platform for small and middle Ukrainian companies. Among the main reasons for that are: i) simplified procedure for entering the platform (if compared with the main platform and other exchanges); and ii) deep understanding of Ukrainian business by Polish investors.
The principal peculiarity of financing of Ukrainian businesses by foreign creditors is that the funds are provided by the creditor to the borrower directly only through loans and direct purchase of stocks. Funds attracted via IPO, private placement or Eurobonds issue, as a rule, are first accumulated on the account of the holding SPV (special purpose vehicle), and established in EU or offshore jurisdiction. Ukrainian company receives funds from the SPV as contribution to the registered capital, or loan on favorable terms or on other legal grounds.
International Loans
Loans are among the most efficient instruments to finance business in Ukraine. Tax Code of Ukraine dated 2 December 2010 No.2755-VI, as well as formerly effective Act of Ukraine "On Corporate Income Tax" dated 28 December 1994 No. 334/94-BP, prescribes that the funds receivable by Ukrainian companies as loans or credits are not included to their taxable income and, therefore, do not cause increase in their tax obligations. Meanwhile, the amounts payable by Ukrainian company to return the loan/credit do not fall within its gross expenses, except for the interest amounts, and cannot be offset against its corporate income tax liabilities.
In addition, international loan/credit transactions are strictly supervised and regulated by the government. If a Ukrainian company obtains loan, credit, etc., from a foreign company, the loan or credit agreement, whatever law is chosen by the parties as applicable, will be subject to compulsory requirements of the National Bank of Ukraine (NBU). Such requirements are determined by the Resolution of the NBU Managing Board "On Approval of the Regulations for the Procedure of Obtaining by Residents of Loans in Foreign Currency from Non-Residents, and Granting Loans in foreign Currency by Residents to Non-Residents" dated 17 June 2004. In accordance with this Resolution loan/credit agreements made with non-residents are subject to registration with NBU and become valid and binding upon the parties thereto not earlier than the registration date. Any material amendments to the agreement (e.g. loan period, interest rate, etc.) must be registered with NBU as well. Registration of the agreement is confirmed by the Registration Certificated issued by the NBU, and of the amendments to the agreement by the addendums to the Certificate. In case a company obtains the loan funds without the said registration, a fine in the amount of 1% of the loan may be imposed upon the company.
What is more, NBU is authorized to establish the obligatory maximum interest rates for the loan/credit agreements with non-residents. The maximum interest rate for a specific agreement depends on the loan period. For the short-term loans (not more than 1 year) the maximum interest rate is 9.8%, for mid-term loans (1-3 years) the rate is 10%, and for the long term loans it constitutes 11%. These rates include not only the interest amounts but also any other payments to be made by the borrower in favor of the lender under the agreement (e.g. penalties, commissions and so forth), which imposes substantial limitation upon the possibilities of the lender to apply financial penalties in case of agreement violation.
IPO/Private Placement/Eurobonds
Formally, legislation of Ukraine does not prohibit national companies to place their shares and Eurobonds directly on the foreign exchanges and trading platforms. However, as of today neither Ukrainian company has direct listing of its shares or Eurobonds abroad. The reason for that are the requirements of the State Commission for Securities and Stock Market (SCSSM) in respect of the issuers and the terms of their placement abroad. In accordance with the Act of Ukraine "On Securities and Stock Market" dated 23 February 2006 No.3480-IV Ukrainian companies intending to place their shares or bonds abroad are required to obtain the Permit from SCSSM. The procedure and terms for obtaining the Permit are regulated by the SCSSM Resolution "On Approval of the Regulations for the Procedure of Granting the Permit for Circulation of Shares and Bonds of the Enterprises of Ukrainian Issuers outside Ukraine" dated 17 October 1997 No.36. The Resolution determines that the SCSSM Permit for circulation of the shares and bonds abroad is granted to the national issuers, registered capital of which constitute at least UAH 5 million (approximately USD 625 thousand). This requirement is out-of-date and does not create any guarantee for financial status of Ukrainian issuers. Legislation of Ukraine establishes that if under the results of the second and any subsequent financial year value of a company's net assets appears to be less than the registered capital amount, then the company is obligated to decrease its registered capital. In case the value of the net assets becomes less than the minimum registered capital, then the company is subject to liquidation. However, in practice these provisions are not complied with due to the state agency authorized to supervise the compliance is not determined and the liability for non-compliance is not prescribed by the law.
Furthermore, in accordance with the Resolution the volume of foreign placement may not exceed 25% of the issuer's registered capital and registration of rights to the securities placed abroad must be conducted under the regulations of Ukrainian laws on depositary system. The last requirement is especially inconvenient for the foreign creditors/investors because as of today they have to keep their securities with Ukrainian custodians and have no possibility of distant access and management of the account.
Because of the abovementioned and some other restrictions introduced by the legislation of Ukraine shares and Eurobonds of Ukrainian companies are not placed directly. As a rule, international creditors finance Ukrainian businesses through purchase of shares, depositary receipts and Eurobonds issued by holding companies established in the EU countries (Cyprus, Luxembourg, etc.) or off-shore jurisdictions with developed legislation.
Purchase of Corporate Rights
Often international creditors finance Ukrainian businesses through acquisition of stock in Ukrainian companies under the borrower's obligation on subsequent buyout. This method gives a creditor the possibility to influence the company's activity and, therefore, makes substantial collateral. However, in most cases the creditors prefer to have in place as an additional security shareholders agreement, which is subordinated to foreign laws.
Shareholders agreements are quite new for the Ukrainian legal system and it is not always possible to make them and, what is more, to enforce in Ukraine. There are some regulations in Ukrainian legislation and court practice, which a potential creditor should carefully consider before entering such an agreement. First, shareholders agreements are allowed only for the members of the joint-stock companies but not the limited liability companies. Second, in accordance with the Act of Ukraine "On Joint-Stock Companies" dated 17 September 2008 No.514-VI the shareholders are authorized to make only agreements that may cause additional obligations for the shareholders in respect of the company and liability for breach thereof, and provided that such possibility is prescribed by the company charter. Third, on 24 October 2008 the Supreme Court of Ukraine adopted the Resolution "On the Practice of Corporate Disputes Resolution" No.13, which prohibits the shareholders to choose foreign law as applicable for the agreements between them or to subordinate resolution of the corporate disputes to international arbitrages. Though the Resolution has no force of law, but formally it is obligatory for Ukrainian courts.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
