IFLR 1000
The Guide to the World's Leading Financial Law Firms

CONTEXT AND TRENDS
In contrast to the first half of 2011, which saw a resurgence in cross border lending into Ukraine and appetite for domestic agriculture companies floated on Warsaw's stock exchange, the latter half of the year and the first half of 2012 was disappointing. "Last year was really good....

CONTEXT AND TRENDS

In contrast to the first half of 2011, which saw a resurgence in cross border lending into Ukraine and appetite for domestic agriculture companies floated on Warsaw's stock exchange, the latter half of the year and the first half of 2012 was disappointing. "Last year was really good. We had financing in the government sector, in the agricultural sector and in the general corporate sector, and it wasn't just EBRD (European Bank for Reconstruction and Development), OPIC and those sorts of people, it was a lot of leading international banks dipping in like BNP Paribas, UniCredit, and some regional players like Gazprom and Sberbank. What we've seen this year is a bit of slowdown," says one lawyer. The well documented issues with the Eurozone, which have seen a general hardening of credit across Europe as banks look to meet new capital requirements, in addition to investors becoming tentative as markets have fluctuated, are to blame, to a certain extent. "What we're hearing from our clients in the banks is that they are taking a bit of wait and see in terms of lending into this part of Europe at the moment," says one partner.

Ukraine also has a number of issues, namely spiralling sovereign debt. With local banks massively overleveraged with government bonds, only blue chip borrowers can secure financing. "Bankers are conservative in terms of selecting potential borrowers. The regulations here domestically change radically so the level of risk they can allow depends on increased protections and securities that not many borrowers can satisfy," says one partner. Lawyers even note that the EBRD said "it was putting projects in hold for a bit," in early 2012, although it has become more active as the year has progressed.

Where there is financing it generally comes from lenders originating from Ukraine's largest Soviet compatriot. "We see Russian banks or Russian owned banks being more aggressive on the market," notes one peer. Another expands: "They are the only guys with money and the only the guys willing to lend. Either through syndicated loans or export credit agencies."

European banks have not only been holding back on new lending activities, these institutions have been actively disposing of Ukrainian risk. "Banks have continued to reduce their portfolios, their exposure to Ukrainian entities. We see a lot of European banks restructuring through the sale of loan portfolios," says one practice head. In truth, this has been the bulk of banking practices work in the last 12 months. "Liability management is one area we are active. Helping the bank dispose of their nonperforming loans, some through public auctions sales, some engage us to create special companies which will keep managing the debt and collecting, but this will written of the balance sheet," explains one lawyer. Often the buyers of these portfolios are either local institutions unconfined by the same regulations as banks or international groups which will repackage the debts and sell it on. "Usually, as they are often sold with a very big discounts there are local guys who are willing to buy because there are local companies which are not as regulated as banks in terms of the collecting practices. Some of these loans go to foreign investors who know how to deal with these distressed assets," says one lawyer. Other banks are looking to exit the market completely but are struggling to find buyers.

Despite the UNB's (Ukrainian National Bank) liquidity concerns, government projects are getting backed. "There are a number of financings in the state sector which are still going on, especially before Euro 2012. There are also a lot of infrastructure projects which need to keep moving and some deals in the energy sector," notes one lawyer. Although Euro 2012 was expected to engender mandates for law firms the bulk of it happened behind closed doors, as often is the case with major government related projects in the Ukraine. "We talk to our colleagues at other firms and no one knows who handles these deals," notes one lawyer. Most were perhaps glad not to of been involved in light of allegations that as much $4 billion in state funds allocated for the tournament was stolen by officials.

On a more positive note, the bulk of major restructuring work has been finalised. "Now we still see some restructuring but most of the larger ones have been completed," says one partner

The level of capital markets work has receded dramatically since summer 2011 when there were a number of Ukrainian agricultural IPOs on the Warsaw Stock Exchange. "What we hear from investors and investment banks is that there is limited or no appetite for Ukrainian risk and investors are concerned about what happens in upcoming elections in fall," says one partner. A common trend has been for deals to be put on hold. "We have worked on two agricultural IPOs in 2012 but they were postponed. We hear from the guys in Warsaw that Polish investors are not that interested in Ukrainian agricultural business because they have had enough of these companies," notes one peer. Currently, IT is the next best proposition. "We have good companies here, which need investment and present good prospects," says one lawyer.

On the debt side too, activity has been affected by international volatility. "We just had a conversation with Allen & Overy about the debt market, it was a very short conversation," says one lawyer. "There are lot of deals which don't reach completion which is a trend especially where they are related to international capital markets," he adds. Quite simply, internationally Ukrainian risk is unattractive and is likely to be so until the tenuous political situation is resolved. "What we here from investors and investment banks is that there is limited or no appetite for Ukrainian risk and investors are concerned about what happens in upcoming elections in fall," says one partner. Ukraine's parliamentary elections will take place in October 2012 and there is a concern that, if as expected, incumbent President Viktor Yanukovych's party is elected again there will be mass protests over the validity of the vote. The decline in foreign interest is driving issuers to the local markets and some lawyers are optimistic about its prospects' given the yields are "quite high". "I believe there is demand for such issues," notes one partner.

The legislation in Ukraine is very fluid and consistently being amended. Among the recent developments, there have been two key changes in relation to banking and finance work. Firstly, the government has relaxed its rules on currency exchange, now permitting residents and non residents to perform settlements in the national currency. Secondly, it will adopt a new bankruptcy law in January 2013 which provides "wider opportunities for businesses to restructure foreign debts." It enables debt for equity swaps, hive down sales and court supervised restructurings." One lawyer notes: "It's quite a dramatic change. The old law was dated 1991 and did not provide much protection for the creditors. It allowed many ways for the borrower to abuse the process. Currently the new law imposes more liability on the directors and has more specific rules on claw back." It will also address the bankruptcy of individuals which is not currently covered under the existing legislation and is developing into a huge issue given the number of non performing loans which are outstanding from Ukrainian banks. Additionally, a draft law on derivatives is reputedly in the final stages of completion.

MAJOR LATERAL HIRES

Marina Tegypko
From: Beiten Burkhardt

CONTEXT AND TRENDS
Consolidation is the buzz word among M&A lawyers in Ukraine. "There is a lot of consolidation, strong Ukrainian groups purchasing smaller competitors expanding their market share," notes one lawyer....

CONTEXT AND TRENDS

Consolidation is the buzz word among M&A lawyers in Ukraine. "There is a lot of consolidation, strong Ukrainian groups purchasing smaller competitors expanding their market share," notes one lawyer. This has been true across the majority of industry sectors including agriculture, food and machinery. With valuations low those who don't need to sell won't. But with the capital markets closed and bank financing difficult there are transactions being driven by necessity. "In general on the market we see is the continuation of the trend which started a couple of years ago, emergency sales and distressed asset sales," notes one peer. In this regard, financial services has been one of the most active sectors as international institutions look to divest of noncore assets or non performing loans and write some debts off balance sheets. "Some of the large multinational banks are trying to exit the market. We've seen a number of transactions and based on our network we know that many others would like to get out they just can't find the right buyer at the moment. I think that will determine the M&A activity for the next year or two," observes one M&A practice head. In some cases, banks which have failed to sell have simply wound up their Ukrainian retail banking arms. Recent transactions include Renaissance's sale of its local banking subsidiary to First Ukrainian Bank and a divestment undertaken by Home Credit, a Czech based bank, which sold its Ukrainian arm to Platinum a domestic bank. Additionally, Sweden's second largest, SEB, sold its local operations to a Ukrainian investor while transferring its corporate arm to a new bank it purchased, in what was effectively a disposal of its non-performing loans.

A more positive trend has been the reappearance of private equity driven transactions. With the capital markets closed and bank finance expensive, Ukrainian companies have sought alternative means of finance. "We see an interesting trend that appeared at the end of last year, early this year, where the capital markets closed for Ukrainian issuers and those companies which were not able to access capital markets or cheap financing they started thinking about private equity investors coming in for a short period of time for 1 to 3 years," says one partner.

A worrying development for the market is the substantial decline in foreign investment from anywhere other than Russia. The frosty political client and impending elections are blamed for this drop off in interest. "We have noticed that the mentality of many businessmen is to wait and see what happens after the election because they have learnt a lesson from the previous elections where things can change dramatically," notes one partner. When President Viktor Yanukovych was elected in 2010 he promptly set up about indicting and imprisoning the leader of the previous regime Yulia Tymoshenko which has led to condemnation from the EU and the possibility that the country may be cut from future IMF funding. Although investors are nervous perhaps foreseeing another Orange Revolution, lawyers say Yanukovych will win and provide stability. "This guy is, I would say, more predictable. He has one straight line, in the sense that you have a move toward dictatorship rather than democracy," remarks one.

As the state has sought to battle its sovereign debt, the biggest transactions have come in the form of privatisations with interest from local and Russian Oligarchs. "The deals are not transparent. For example, Ukrtelecomm is the deal of the year, If you ask who handled it we don't know. If you ask who acquired we could point to some publication which says there is some company in Austria which no one knows about," says one lawyer. The details of these are hard to ascertain as external council is never involved. "For many other Ukrainian deals they shake hands and the in-house council drafts a three page document. That type of M&A activity is also present even more than it used to be. Unfortunately it's hard for us to evaluate it," notes one peer

Energy has been the most active sectors in this respect and lawyers note renewable is particularly appealing given the astronomically high feed in tariffs. Rumours that the value may be cut are dismissed as no more than that unless there is a change in government after the elections. "Cutting it would be a big disaster because it would ruin the predictability of the model for everyone. In a situation where you have certain people behind the largest projects who have very high positions in the government I'm not sure this will happen, but in today's' political situation we cannot be sure they will preserve their position," notes one partner.

MAJOR LATERAL HIRES

Andrei Liakhov
From: Integrites
To: Sayenko Kharenko

Tamara Lukanina
From: Ukrainian Legal Group
To: Asters