Please highlight any main trends or shifts in the current Ukrainian financings market?
Due to limited or no appetite for Ukrainian risk and global finance markets volatility, capital markets and traditional bank lending are no longer easily accessible to Ukrainian borrowers (subject to few exceptions). At the same time, supply of ECA-backed trade financing continues to be available and trade financing seems to be active this year as well.
Trade finance as an instrument â€" is it popular in Ukraine?
Yes, this instrument is in high demand due to the absence or lack of other readily available sources of funding and heavily outdated technologies used by Ukrainian companies requiring upgrade by the more advanced technologies produced by developed countries (e.g., countries of the European Union or United States).
Trade finance involving an ECA: what are the pros and cons?
Pros include the relatively low cost of funds for borrowers and the availability of long-term funding, low risk for lenders due to ECA coverage and guaranteed payment to foreign exporters.
Cons include the relatively insignificant amounts of trade finance loans (as compared to syndicated loans) and the involvement of additional parties (other than lender and borrower) such as ECAs and foreign exporters which may affect deal dynamics and result in certain delays (extra time may be required for agreeing on deal structure and finalization of transaction documentation).
What is the role of ECAs in trade financing?
It is difficult to overestimate the role of ECAs in trade financing. ECAs provide insurance coverage (guarantee support) to lenders, thus substantially reducing lendersâ€" credit risk exposure. As a rule, ECAs are actively involved in the process and will never sign off on insurance coverage or give the green light to a particular trade financing unless they are absolutely comfortable with the deal structure, transaction documentation, financial standing of a borrower, results of legal due diligence of the borrower, and overall risk assessment in relation to such transaction.
Are there any Ukrainian ECAs? Are they supported by the government? Is there any prospect for the emergence of an active Ukrainian ECA?
In May 2012, the Ukrainian Parliament passed the law on state support of export activity. This new law contemplates establishment by the Cabinet of Ministers of Ukraine of the Ukrainian export credit agency (â€SUkrainian ECAâ€) for purposes of insuring commercial and non-commercial risks of Ukrainian exporters and providing guarantees in relation to performance by foreign purchasers of their obligations under export contracts. However, it still remains to be seen how and when the Ukrainian Government will manage to implement the above law but there is no doubt that this will not be an easily achieved goal due to the following reasons. The Ukrainian ECA is to be a state-owned agency. This means that, in order establish a Ukrainian ECA, the Ukrainian government will need to find sufficient funds for that purpose. In light of the current budget deficit, this will likely be a challenging task. Usually, ECAs are backed by the countries with A high credit rating (e.g., Germany, the Netherlands, France, Switzerland, U.S.), while Ukraine is unlikely to be viewed as one of those. Finally, ECA-backed trade financing is mainly focused on supporting the production and export of highly technological equipment, while, in the foreseeable future, Ukraine would predominantly be an active â€Sconsumerâ€ rather than a â€Ssupplierâ€ of such equipment. For the above reasons, the prospects of the appearance of an active Ukrainian ECA in the near future may be cloudy.
How do Ukrainian exporters insure their risks in the absence of a Ukrainian ECA?
In the absence of Ukrainian ECA insurance, Ukrainian exporters minimize their non-payment risks by use of such instruments as letters of credit and advance payments.
What are the main issues under Ukrainian law that ECAs should be aware of?
I would highlight the following two types of issue which should be taken care of in the context of ECA-backed financing in Ukraine.
- Corporate approval requirements: In addition to existing corporate authorization requirements under Ukrainian law, the Ukrainian joint stock company law introduced additional corporate authorization requirements for Ukrainian joint stock companies. For example, if a particular transaction satisfies â€Ssignificant transactionâ€ and/or â€Sinterested party transactionâ€ tests, such transaction will be subject to prior supervisory board approval or approval by general meeting of shareholders.
- Regulatory approval/currency control requirements: Ukrainian law provides special regulation for foreign currency loan agreements with foreign lenders. In addition, unlike other CIS countries, Ukraine still has a strict currency control regime imposing certain restrictions for different types of cross-border payments.
What are the alternatives to ECA-backed financing?
Any other available financing instruments which would have certain disadvantages as compared to ECA-backed financing which is specifically tailored for trade financing purposes.
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