2012 – Directly to Diversification of Financial Sources

May 15, 2012 - PRLog -- Finance is always a burning issue for developing domestic enterprises and is usually crucial when choosing a foreign producer or general contractor for a project.

It is no secret that in 2011 there were few positive trends in the Ukrainian corporate lending sector: interest rates reached 30% per annum in UAH and requirements for collateral came close to 200-300% of total funding.

Long-term (investment) credit itself has become a pure fiction: domestic and foreign-owned banks in Ukraine were mainly focused on short-term loans (up to 1 year). This trend is likely to spread in 2012.

Nothing is impossible
Given all the above mentioned reasons, Ukrainian enterprises continue to look for alternative sources of direct financing abroad.

And despite all the sceptics, it is quite possible for steadily developing and financially stable companies only marginally exposed to country risk. In the mass media, one can find such companies as Metinvest or Milkiland often mentioned in this context. Other smaller companies are normally offered foreign export (trade) financeunder the guarantees of a national bank (on the basis of interbankagreements) by the national financial institutions.

But in the implementation of similar projects, long-term finance attracted directly from foreign banks (without involving a Ukrainian bank as guarantor) is available for regional corporate borrowers with much less turnover than Metinvest or Milkiland. The main requirement is corresponding to the criteria of the foreign financing bank, which is quite achievable with proper business preparation.

What’s the benefit for both buyer and seller?
External finance can significantly reduce interest rates (up to 10-11% overall in €), but more importantly, no collateral is needed. The terms of such financing may vary from 5 to 20 years. Moreover, this type of project implementation allows a company to create an international credit history and therefore gain access to more profitable financial conditions. And it is even more important that attracting direct export and project financing becomes part of a company’s strategic development abroad and can be seen as a preparatory stage for an IPO.

For prospective large-scale projects (€100 million and above) which are attractive investments and still of interest to foreign creditors, the dominant market tendency in 2012 shall be following: the creation of foreign bank and insurance company pools which will allow risk distribution and make the project feasible even in Ukraine’s unstable economic conditions.

What if...
At the same time, engaging a regional bank to undertake a borrower’s risks is in some cases the only possible option to involve finance. This situation is quite common when a company has a low credit rating or a brief history (exisiting less than 2 years), or also the absence of affiliated companies, the financial stability of which may have a positive impact on the borrower’s credit rating and the whole group of companies as well.

However, this scenario will of course raise the cost of funding by adding the domestic bank’s margin and will once again make it necessary for the borrower to provide collateral. At the same time, such schemes can be the first step towards involving direct finance and gives the debtor time for business preparation.

It is crucial to determine the stage of the borrowing company: whether it is ready to attract direct foreign debt capital or requires a specific preparatory work involving a regional guarantor bank, which is only possible after conducting an initial credit analysis and negotiating with potential foreign creditors and insurers. Naturally, the results of the preliminary credit conclusion must be confirmed during the second stage, which includes a deep analysis of the project and the Due Diligence of the borrowing company and affiliated enterprises during project implementation.

Healthy ambitions
In conclusion, it should be noted that a growing number of regional enterprises are strategically focused on being placed on foreign stock exchanges and consider an IPO as an attractive way of financing. These are companies operating in the metallurgical and agricultural sectors as well as in retail. In the next year, the Warsaw stock exchange predicts the placement of at least five Ukrainian companies and preparation has already begun.

Our state cannot remain indifferent to world tendencies. In 2012 we expect the beginning of a project on domestic IPO instrument implementation as well as the establishment of our own export credit agency designed to support regional exporters.

Author: Kateryna Barabash, Managing Director, IBcontacts

IBcontacts company specializes in developing trade relations between Ukrainian companies and their foreign partners. The company works in the fields of trade, project and structured finance, credit management and trade facilitation, providing full range of financial, market research and legal services (www.ibcontacts.com.ua).
For more information, please address Head of IBcontacts Communications Department Ms. Anna Dzhenkova via phone +38 044 359 02 00 or e-mail: pr@ibcontacts.com.ua