The sharp fall in margins throughout the EU accession countries and Russia has driven investors towards Ukraine in search of new relationships and better returns. But it is still a developing market and lenders remain cautious, reports Charlie Corbett.
Ukraine has caught the eye of lenders hungry for higher returns over the last six months. Although EU accession remains a distant dream, a 9.3% growth in GDP in 2003 means the country has one of the fastest growing economies in the region.
This makes it especially attractive for lenders that have grown weary of tight margins and ever loosening covenants on deals in the EU accession countries and Russia.
The Czech Export Bank's latest facility clearly demonstrates the position facing bankers. As this publication is printed it is not yet known what the margin for the $200m deal will be, but most in the market estimate it will drop as low as 10bp over Libor.
"There is not much room for pricing to go further down," says Elena Ivanova, a director of syndications at ING in London. "It is already at a par with or below large parts of western Europe."
Similarly, margins on Russian bank deals have plummeted. Gazprombank approached lenders in January for the first time in six years for a $100m loan, priced at 180bp over Libor, under half the value of its previous deal.
Activity in Ukraine in the first quarter of this year reflects a shift in direction for banks. The six month extension to Ukrsotsbank's $13m trade finance deal was signed in March and pays a margin of 400bp over Libor and though that is the only deal actually signed this year, there are several others going through the market.
First Ukrainian International Bank's $10m loan, which pays 395bp over Libor, raised over $29m from the market. Syndication for that deal closed in early April.
Aval Bank has also approached lenders, for the second time in three months, to arrange a $25m loan. Bankers, however, are sceptical that the deal will be a success given that the lender is returning to the market so soon after its last loan.
However, given that just four deals were signed in the whole of 2003, the first quarter volumes of this year bodes well for the region and bank borrowers in the region are optimistic of a healthy flow of deals.
"We received a $30m syndicated loan arranged by ING in 2003, that was increased from $20m because of the high level of demand," says Nikolay Oudovichenko, deputy chairman of the board of state owned Ukrexim Bank. "Our aim is to create positive benchmarks for the Ukrainian banking sector."
The big question, however, is whether the corporate market will spring to life in 2004 and this will depend on companies' ability to meet tough western criteria on corporate governance.
Ukrainian Mobile Telesystems signed a $60m three year deal in September through Standard Bank and ING and there are rumours that Kyivstar, the Ukraine's second largest mobile operator, will be coming to the market shortly for $50m.
"There will be an increase in corporate deal volumes, but the rise will not be as steep as it has been in Russia," says Georg Feldscher, head of syndications at RZB in Vienna. "Deals will be smaller, have shorter tenors and higher margins."
International investors remain wary of Ukrainian corporate deals and are likely to remain so for some time. The market is not yet as developed as it is in Russia and there are few big oil and gas exporters in the region, traditionally the starting point for large internationally backed structured deals.
Corporate governance is a problem. "Compared to Russia there are a limited number of companies with transparent ownership structures and international accounting standards," says Feldscher. "Volumes will not increase significantly until the market becomes more mature."
It is unlikely that deal sizes will be stretched to beyond $60m on a maximum of a one year tenor and few in the market see this situation changing in the near future.
Political instability in Ukraine is perhaps the single biggest deterrent for international investors in the region. President Leonid Kuchma is not favoured by certain western leaders and is regarded by some opposition figures as running a semi-autocratic government.
Elections in October, however, should signal the end of the Ukrainian premier's time in government. He has already served two presidential terms and is barred from serving a third, despite an aborted attempt by his supporters in early February to amend the constitution.
"Much will depend on the result of the elections in October. The political situation will most likely undergo some considerable changes," says Feldscher. "If a widely accepted president is elected in November then we may see more extensive changes in 2005."
The Ukrainian loan market in 2004 will continue to be the domain of a small number of exploratory banks, which specialise in opening up new markets in the search of high margins.
Just a handful of international banks have a local presence in the region, such as Crédit Lyonnais, HVB, ING and RZB, as compared to between 30 and 40 in Russia.
Ukrainian corporates need to enhance transparency and introduce international accounting standards before more international investors will be prepared to lend. It looks likely that volumes will increase in the coming year, but not sharply, and lenders will remain wary of the credits they choose.
"If banks are brave and pick out the right risks, they will find much more interesting opportunities than with the majority of deals in Russia and the EU accession countries," says RZB's Feldscher. "It is a riskier environment to invest, but you do not get high margins for nothing."