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The EBRD in Ukraine
Experience and Expectations for 2012
December 8th 2011, Lviv
Graeme L. Hutchison
EBRD Deputy Country Director
The EBRD
Who is the EBRD?

The European Bank for Reconstruction and
Development is an International financial institution,
promoting transition to market economy in 30 countries
from Central Europe to Central Asia

Owned by 61 countries and 2 institutions

Capital base of over €30 billion

Head office in London, UK

Highest possible AAA credit rating
Global Shareholder Structure
2010 Annual Meeting: 50% capital increase to €30 billion




Current paid in capital is €6 billion
including an increase of €1 billion in
May 2010
Current callable capital is €15 billion
In 2010 the Board of Governors
approved a 50% increase in the
Bank’s authorised share capital from
€20 billion to €30 billion
The €10 billion increase* will provide
additional investment capacity for the
period 2011-2015 to enhance the
Bank’s response to the global crisis
* Callable capital to be increased by €9 billion upon
receipt of subscriptions from members, with the
provision to review its usage after 5 years
Shareholders breakdown
EU 27
Countries
(1)
62.7%
Japan
8.6%
USA
10.1%
(1)
(2)
As at 1 September 2010
Others
11.3%
EBRD
region
excluding
EU (2)
7.3%
Includes European Community and
European Investment Bank each at 3%;
France, Germany, Italy, UK each at 8.6%
Russia at 4%
EBRD Investments
€ billion


55
10
45
8
35
6
25
4
15
2
5
-5
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Debt ABV
Reconciled as at 31 December 2010
Equity ABV
Net Cumulative Business Volume
Net cumulative business volume

Invested over €62.0bn
in more than 3,119
projects since 1991
Private sector > 79% of
EBRD finance
Debt 83%, Equity 17%
of EBRD finance
€9.0bn invested in 2010
Annual business volume (ABV)

65
12
What are the EBRD’s Objectives?

Promote transition to market economies by investing
mainly in the private sector

Mobilise investment

Support privatisation, restructuring and better
municipal services

Encourage environmentally sound and sustainable
development
The EBRD in Ukraine
EBRD in Ukraine – first 20 years

Largest financial investor in the country with almost 20
years of experience in the local market

Ukraine is the Bank’s second largest country of
Operation (after Russia)

Clients - leading local and foreign companies

Focused on long term financing of debt and equity, but
also funding working capital, trade and purchase of
industrial equipment

Total cumulative amount invested in Ukraine to date is
over EUR 7 billion - funding almost 290 projects
EBRD Annual Business Volume - Ukraine
EBRD Annual Business Volume in Ukraine
(EUR million)
1,000
750
1,013
500
797
964
835
900
647
529
250
300
116
0
2003
2004
Net ABV
2005
2006
2007
2008
2009
2010
28-Nov11
EBRD Current Portfolio in Ukraine –
Allocation by Sector (30 September 2011)
Total Portfolio Euro 4,3 billion
Loans
87%
Private
sector
65%
Equity
13%
Public sector
35%
Equity Funds
4%
11% Agribusiness
15%
Manufacturing and
Services
6% Municipal Infrastructure
3% Natural Resources
13% Power and Energy
Financial
Institutions
27%
2% Property and Tourism
1% Telecommunications
18%
Transport
Working With The EBRD
Benefits of working with the EBRD

Preferred Creditor Status – granted by the GoU in the
Agreement Establishing the EBRD is key. Because of this:
– Many companies consider that the EBRD provides a level of
protection against unfair treatment and corrupt practices.
– Co-lending banks (especially B Lenders) like to partner with the
EBRD for the same reason – and as such involving the EBRD can
act as a catalyst to attracting other banks.

The Bank has been active and represented in the Region for
almost 20 years:
– Extensive knowledge of local economy, business environment and
practices
– Close working relationships with government
Benefits of working with the EBRD

EBRD is willing to share the political risks

Financial flexibility (wide range of products tailored to fit
client needs).

The Bank is increasingly unique as an institution willing to
lend long-term.


The Bank is willing to take equity stakes in clients – both true
equity and portage equity. Typically the Bank takes a seat on
the Advisory Board and can provide significant local
knowledge and support.
Technical assistance is available – particularly for projects
including components of energy efficiency.
EBRD Financing Features - Debt





Amount - typically over € 10 million - typically limited to 35% of the
total project cost of a project;
Currency – typically USD and or Euros (we currently have no
capacity to lend in local currency);
Structure – we can consider investments as Senior, Subordinated /
Mezzanine, - Long-term, and short term Working Capital Finance.
We can work alongside domestic and international banks ;
Term / Maturity – typically up to 5-8 years for Long-Term Senior
Debt to companies – potentially longer for projects;
Margins – dependent upon the risk profile. Note, that the EBRD can
provide debt with a significantly longer term than is typically available
to private companies from local banks.
EBRD financing features - Equity



As an equity investor the EBRD can provide new
equity as a minority shareholder - typically, when we
invest equity, our share is between 25% and 35%.
Through the Supervisory Board, EBRD will participate
in increasing shareholders’ value.
We look to sell our shares (typically after 5 to 7 years)
either together with the controlling shareholders to a
new reputable owner, or under a put option back to
the controlling shareholders.
How to Approach the EBRD

There is no specific template

Each financing will require thought and a tailored
information package

The following provides and outline of what we would
normally expect to be provided with:
EBRD Expectations / Requirements
1) Transparency – a clear willingness and intent to provide
accurate and honest information
2) The transaction needs to be “bankable”
a) Economic – i.e. projected cash flow is robust, justifiable
and sufficient to repay debt – speculation is an equity risk;
b) Management has the necessary experience, a reputable
track record and can evidence a willingness to embrace
good business practices;
c) Ability to provide an information package containing
sufficient information for the Bank to make a preliminary
assessment
3) IFRS accounting – annual accounts need to be audited in
accordance with IFRS.
Information Package / Business Plan
Basic Description of
Company / Project
- History / activity of the Company
- Relevant management experience
- Description of the operation – and proposed use of funds
- Major suppliers / buyers
- Exports / imports
Summary of Assets
- What assets does the Company own?
- What is their realistic value?
- Where are they located?
- Are they pledged to banks?
Clear Ownership
Structure
- Clear description of all ultimate shareholders noting
any political connections.
- Organization chart showing all companies in the group
+ jurisdictions of incorporation
Summary
Financial Projections
- Summary financial projections for the life of the debt
- A clear summary of the key assumptions
- An overview of existing bank debt – by bank including
terms / amortization structure / security
EBRD Project Approval Procedure:
• EBRD receives initial information (Info. Package / Business Plan) and
considers project – Concept Review (approx. 1-2 months)
• Following Concept Approval – a Mandate Letter is signed which outlines
the project plan, development expenses and responsibilities.
• Due diligence and Project preparation – conclusion of a Term Sheet.
• Final Review by Credit Committee (approx. 3-6 months from Concept
Review)
• EBRD Board Approval of Directors (approx 1 month)
• Signing – at which point documentation becomes legally binding
Total project preparation time: approx. 6-9 months (depending on
project status and the Company’s preparedness)
Ukraine – Looking to the
Future
Comparisons
Ukraine
Russia
Turkey
Romania
Population
46m
140m
73m
22m
GDP (US$)
132bn
1,479bn
737bn
162bn
GDP per cap.
(US$)
2,911
10,438
10,127
7,542
Debt (US$)
142bn
489bn
290bn
120bn
Foreign reserves
(US$)
33bn
479bn
81bn
46bn
WB ease of doing
business ranking
152
111
71
72
Prospects for the Years Ahead – Current
Situation
The Current Situation
• Endemic corruption
• Increasingly aggressive Tax dept.
• Corrupt Customs Dept
• Corporate raider activity
• No clear GoU direction / strategy
• Risk of UAH devaluation
• Increasing cost of UAH debt
• No LTD maturities available –
forcing companies to finance ST
• Inefficient legal system
• Decline in WB Ease of Doing
Business Rating (152/183)
External Influences
• Financial crisis in Europe
• Euro banks focused on problems
at home
• Lack of funds for FDI – investors
are very particular
Prospects for the Future??
• Difficult to be positive….
• No long-term funding available in UAH
• Very little investment appetite from Euro banks
• EBRD / IFC are the only real LTD providers
• Very little real FDI / investment appetite
• Many companies will defer capex plans
until some degree of stability returns
Short-term challenge in Ukraine:
avoiding a new crisis
Macroeconomic risk: medium to high:

High levels of external private sector debt (foreign currency
denominated and much of it short-term);

Pegged exchange rate;

Large fiscal rollover requirements;

Poorly capitalized and highly dollarised financial system;

Loss-making energy sector.

NBU / Government needs to urgently address the lack of liquidity in
local currency – and facilitate longer term funding lines.
Ukraine: longer-term challenges
Key priority:
To improve the institutional and business environment / reduce
corruption and attract investment.
Other challenges:

Diversifying export base;

Reforming NaftoGaz;

Reducing dollarisation and pursuing independent monetary policy;

Increasing productivity in agriculture – food security

Improve legal system
What Can We Expect To See

2012 is likely to be a very difficult year for Ukrainian companies.

The Only industry which is likely to remain strong is Agribusiness.

GDP growth is likely to fall (to below 4%) - due to weaker exports

Consumer spending is likely to remain curtailed.

Devaluation concerns may be addressed in the short run (if the
government can conclude a gas deal with Russia). IMF deal now seems
unlikely. UAH 10 to the $??... the potential still exists!

Exports have become less competitive (as most neighboring countries
have already devalued against the US$) and will take time to recover.

Demand from overseas will be severely impacted by the effects of the
broader recession

Violation of key democratic principles and ongoing political pressure on
the opposition will leave the door to the EU closed.
The EBRD

The EBRD will remain committed to support commercially viable
local and international companies that embrace transparency
and good business practices.

Our Ukraine Strategy Paper is available on our web site:
http://www.ebrd.com/pages/country/ukraine/strategy.shtml

We expect to see an increasing appetite for the EBRD - both as a
lender and as equity (often to provide some level of protection)

We are concerned that some companies will take short term debt
to fund long-term assets.
How to contact us
Tel: +380 44 277 1100
Fax: +380 44 277 1160
Email: [email protected]
www.ebrd.com/ukraine
Kiev Resident Office
16 Nemyrovycha-Danchenka st.
Kiev 01133, Ukraine