Q: COULD YOU PROVIDE A BRIEF OVERVIEW OF RECENT BANKING AND FINANCE ACTIVITY IN UKRAINE? ARE BANKS IN GENERAL DEMONSTRATING A STRONG APPETITE TO LEND, PARTICULARLY IN SUPPORT OF CORPORATE TRANSACTIONS?

OLSHANSKY: In recent years, the growth of the Ukrainian banking sector has slowed considerably. Pre-financial crisis, many international banking groups entered the Ukrainian market, mostly by purchasing majority stakes in local banks. That trend has now reversed, and Western banks are selling their Ukrainian assets en masse. At the same time, a number of Russian banks are maintaining a strong presence in the market via their subsidiaries. Lending growth rates have never quite recovered after the crisis. According to the National Bank of Ukraine (NBU), the Ukrainian central bank, the principal amount of loans extended to businesses as at 1 January 2013 was only 5 percent higher compared to 1 January 2012. The principal amount of long-term loans to businesses shrank by 5 percent in the same period.

Q: WHAT TYPES OF FINANCING SEEM TO BE POPULAR? ARE NONTRADITIONAL DEBT SOURCES PLAYING A NOTABLE ROLE IN SERVICING CORPORATE DEMAND FOR DEBT IN UKRAINE?

OLSHANSKY: Due to a lack of cheap funds in the domestic market, local banks and large corporates try to access international markets by borrowing from foreign banks and issuing bonds abroad. Early 2013 saw increased interest in bonds originating from Ukraine, with PrivatBank and state-owned Oschadbank and Ukreximbank placing bond issuances in international capital markets. Among the corporates, DTEK, MHP and Ukrzaliznytsia have each issued bonds abroad. However, because of higher transaction costs and currency control restrictions, cross-border financing it is not an option for many businesses. For example, the interest rate on such loans is restricted by the NBU to 9.8 to 11 percent per annum, depending on maturity. This also affects bond issuances since many of them are structured as loan participation notes. Alternative funding options include borrowing from the IFIs such as the EBRD and the IFC or issuing local currency denominated bonds.

Q: HOW WOULD YOU DESCRIBE INTEREST RATES, COVENANTS AND OTHER TERMS APPLIED TO DEBT OFFERINGS IN THE CURRENT MARKET?

OLSHANSKY: The widespread expectation is that local currency will soon depreciate and intense competition among the banks for retail deposits drives interest rates on both deposits and loans high. According to the NBU, in May 2013 the average interest rate on local currency loans to businesses was 13.6 to 18.8 percent per annum depending on maturity, and 9.3 to 10.9 percent per annum for loans in foreign currency. Loan agreements are increasingly complicated and incorporate many concepts borrowed from Western jurisdictions, such as multiple representations and events of default. Consequences of misrepresentation are, however, unclear under Ukrainian law, and are usually specified in the loan agreement. Loan agreements often include a provision allowing the bank to increase the interest rate. The law prohibits increases in interest rates without borrower's consent, but if the borrower does not agree it is usually obligated to prepay the loan.

Q: ARE LENDERS TAKING ALL PRECAUTIONS TO ENSURE THEY GAIN SECURITY OVER ASSETS? WHAT CONCESSIONS MAY DEBTORS NEED TO ACCEPT IN ORDER TO OBTAIN A FINANCING PACKAGE?

OLSHANSKY: Loans extended by Ukrainian banks are often collateralised. Enforcing security interests in Ukraine can sometimes be difficult, because the law seems to favour collateral givers, and presents multiple loopholes and opportunities to defraud the lenders. Banks would normally be very cautious when taking collateral, including due diligence of the collateral giver, inspection of collateral and thorough verification of the authority of the signatories. The borrower would often have to agree to maintain its accounts at the lending bank, to ensure a minimum turnover through such accounts and accept the bank's direct debiting rights in case of failure to pay. Banks would sometimes insist on notarising security agreements even if there is no specific legal requirement. Notarising increases costs but provides additional verification of the signatories' authority and additional options at the time of enforcement.

Q: HAVE YOU SEEN ANY REGULATORY CHANGES IN UKRAINE OVER THE PAST 12-18 MONTHS THAT WILL AFFECT THE BANKING INDUSTRY GOING FORWARD?

OLSHANSKY: One of the major post-crisis changes was the prohibition of retail lending in foreign currency. Prior to the crisis, foreign currency lending was popular due to lower interest rates. During the crisis, because of rapid depreciation of the Ukrainian hryvnia many foreign currency loans became non-performing. The NBU prohibited foreign currency lending as a temporary measure in 2009, and this was perpetuated by the amendments to the law on consumer rights that became effective in October 2011. The prohibition does not affect lending to businesses. Another amendment introduced at the same time was a requirement that floating interest rate agreements should specify a ceiling beyond which the rate may not grow. A more recent change that became effective in September 2012 was the transfer of powers to administer insolvent banks to the Fund for Guaranteeing Individuals' Deposits. Nevertheless, the NBU continues to play a major role in the insolvency process.

Q: IN YOUR OPINION, WHAT ARE THE KEY ISSUES AND CHALLENGES FACING SENIOR BANKING & FINANCE EXECUTIVES IN 2013? IS THERE A CONSCIOUS EFFORT TO REGAIN TRUST AND REPAIR REPUTATIONS FOLLOWING THE FINANCIAL CRISIS?

OLSHANSKY: 2012 marked the return of Ukrainian banks to profitability, with profits of almost UAH 5bn ($626m) compared to losses of UAH7.7bn ($964m) in 2011, according to the NBU. However, Ukrainian banks have yet to translate their increased profitability into resumed lending to the Ukrainian economy. An important challenge of 2013 is driving the interest rates down. Only a small number of businesses can sustain the current cost of financing in the domestic market, and for most of them borrowing abroad could be a better option. Equally important is to continue finding ways to improve the banks' lending and reduce the number of non-performing loans, including through write-offs. The principal amount of non-performing loans has grown dramatically between 1 January 2008 and 1 January 2013, according to the NBU, and represents a significant share of total outstanding loans.

Q: WHAT DEVELOPMENTS IN BANKING & FINANCE DO YOU EXPECT TO SEE IN UKRAINE THROUGH 2013 AND BEYOND?

OLSHANSKY: The Ukrainian government declared its commitment to continued reform and development of the Ukrainian financial markets. In October 2013, the new law on the depositary system is expected to become effective. The law provides for the establishment of one central securities depositary and multiple clearing houses to provide clearing services and serve as central counterparties. However, it is currently not entirely clear how such clearing houses will be organised. Several important draft laws are considered by parliament or are expected to be submitted to parliament shortly. For example, the working group established by the government that includes representatives of the EBRD is currently finalising a draft law on derivatives.

Originally published by Financier Worldwide.

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