Equity capital markets for Ukrainian business. Rules of the game

At the time when local capital markets are underdeveloped, a true domestic IPO is not yet an attractive idea for corporate finance strategists. Following the standstill caused by the financial crisis of late 2008 through early 2010. in 2011 Ukrainian businesses, inspired by apparent recovery from the recent economic downturn, resumed looking at ECM to overhaul their old assets and further expand operations structurally and geographically, Oleksiy Demyanenko, associate at Asters, provides an overview of certain key issues that must be considered by local businesses entering equity capital markets and shares his thoughts on the situation in eurozone.

What is the most suitable way to float on the foreign stock exchange?

There are a number of different ways in which local businesses seeking to float can enter the ECM: (a) direct share placement by Ukrainian issuer on a foreign stock exchange; {b) placement of depositary receipts representing shares in Ukrainian issuer; (c) placement of depositary receipts representing shares in a foreign holding company that owns the majority of shares in Ukrainian issuer; and (d) placement of shares in a holding SPV.

Given an unequivocal prohibition of denomination of Ukrainian stock in foreign currencies and oppressive applicable regulations by Ukrainian securities supervisors a direct IPO of Ukrainian shares at international markets remains to be
a bright future while depository receipts have become an everyday practice and indirect issues through a holding SPV are ready to be launched by many.

IPO through the issuance by a foreign depository bank of depository receipts (ADRs, EDRs. or GDRsi listed at a foreign stock exchange with underlying local shares was broadly used by Ukrainian companies over the last decade. Initially, many of those issues were not intended to get finance to the Ukrainian issuer. Relevant depositary receipt programs were of so called first and second levels with underlying shares admitted to the program from the secondary market when the main purpose of the program was to raise international publicity of Ukrainian businesses. Level 3 and 4 are true share placements.

In case of an IPO through a foreign holding SPV what will be the best jurisdiction for incorporation of the issuer?

The following factors shall be considered when setting up a foreign listing vehicle: available options for effective tax planning, timing for approval of the prospectus and level of protection of minority shareholders. Considering the above criteria, the most popular jurisdictions for incorporation of the issuer are: Luxemburg, Cyprus and the Netherlands. The statistics below shows that all 'Ukrainian' IPOs in 2010/2011 were structured through one of these jurisdictions
with Luxemburg leading the list.

Since the double tax treaty between Ukraine and Luxemburg has not been ratified and local businesses do not have direct tax preferences, one may be confused by the increasing popularity of this jurisdiction. The reason is obvious. According to the European regulations a prospectus (IPO admission document) may be approved by the issuer's home competent authority in the EU and 'passporteo" to another EU member state as the basis of a public offer or admission of securities to a regulated market Approval of the prospectus in Cyprus may take up to 4 months, while Luxemburg regulator recently did the same within 3 weeks; and it is not surprising that volatile markets made timing crucial for businesses looking for a window of opportunity to have a successful placement. For effective tax planning structures incorporate Cypriot sub-holding entity between the issuer and Ukrainian companies of the group.

What are your expectations regarding situation in Eurozone?

For the majority of Ukrainian companies international capital markets were essentially closed during last several months due to volatility in the Eurozone and only very high-profile businesses were able to make debut issues. Investors were gripped by the approaching prospect of the US sovereign default and collapse in Europe. Although it is difficult to predict when markets will improve and the world would return to its former health, issuers are trying to be ready to go ahead when they see a window of opportunity.

It is expected by many that the first offerings will come from mature companies since investors are going to be very selective about what they are looking at and will be unwilling to pay for future growth as much as stable cash flows. Many potential issuers have avoided the ECM in the second half of this year because of depressed share prices, but capital markets will inevitably stabilize and there remains enough room for optimistic expectations.