Ринки капіталів. Диверсифікація фінансових інструментів: частина ІІ
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Capital Markets. Diversification of Financial Instruments: Part II
(Editor's Note: This is the second installment of a two part article and Capital Markets. Diversification of Financial Instruments, Part I was published in the August 2007 issue of the Russia/Eurasia Executive Guide.)
International capital markets have been frequently used by Ukrainian sovereign, corporate, and municipal issuers in the new millennium. Inspired by apparently nonreversible independence of Ukraine and steadily recovering and growing economy, Ukrainian business looks for the new capital to overhaul its old assets and further expand operations structurally and geographically. International financial and capital markets with their scrutiny and formality discipline Ukrainian businesses seeking capital and make them a part of global economy.
ALTERNATIVE FINANCE TOOLS
IPO has become recently a hot topic for academic reviews and discussions by practitioners at the numerous domestic and international conferences. At the time when local capital markets are underdeveloped, a true domestic IPO is not yet an attractive idea for corporate finance strategists. 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 an unrealistic dream 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 GDRs) listed at a foreign stock exchange with underlying Ukrainian shares was used by Ukrainian companies more than thirty times over last 10 years. 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.
Exhibit 4 shows the standard GDR/ADR structure.
The private depositary receipt placements based on Rule 144A (exclusively among qualified institutional investors in the USA) or Regulation S (outside the US capital markets) are easier to implement than heavily regulated ADRs of third level. Both techniques, however, allow bringing capital directly to a Ukrainian issuer. Certain legal issues pertaining to depositary receipts remain to be challenging and requiring special attention (e.g., beneficiary holding of shares under the depository agreement vs. "true ownership" of shares under Ukrainian law, split voting right by a depositary at the shareholders meeting of a Ukrainian issuer, discretionary proxy provision in the depository agreement regulating the management's control of the issuer, or currency control requirements related to payment of dividends). Under Ukrainian tax law, dividends paid by a Ukrainian stock company to a foreign shareholder are subject to 15 percent withholding tax, which may be reduced by an applicable tax treaty. Exhibit 5 shows most favourable jurisdictions under Ukrainian tax treaty.
An indirect IPO through a foreign holding SPV became a reality in Ukraine since broadly publicized Ukrproduct's break-through in the middle of the Orange revolution. The Ukrproduct's experiment with offering at the AIM of London Stock Exchange may and hopefully will be successfully followed by a number of pragmatic financial stalkers. At the same time larger and pickier issuers will likely target soon the main markets of leading stock exchanges in the attempt to gain more solid capital and name. Almost in all cases, the strict data disclosing rules and audited financials require the issuer's business and mental restructuring as a preliminary stage. It seems that many companies in Ukraine have already stared such restructuring.
EXHIBIT 5
Interest Rates Applicable under Double Tax Treaties of Ukraine
|
|
Jurisdiction
|
Tax on Dividends
|
|
Full Rate
(%)
|
Reduced Rate (%)
|
Reduced Rate Applies if beneficial owner of dividends is a holder of at least:
|
|
1
|
Belgium
|
15
|
5
|
20 % of the issuer's capital
|
|
2
|
Cyprus1
|
0
|
0
|
—
|
|
3
|
Germany
|
10
|
5
|
20 % of the issuer's capital
|
|
4
|
France
|
15
|
5
|
10 % of the issuer's capital
|
|
0
|
50 % of the issuer's capital and the investment equals to 5 million francs.
|
|
5
|
Kingdom of Netherlands
|
15
|
5
|
20 % of the issuer's capital
|
|
0
|
50 % of the issuer's capital and the investment equals to USD 300.000
|
|
6
|
Switzerland
|
15
|
5
|
20 % of the issuer's capital
|
|
7
8
9
|
United Arab Emirates
|
15
|
5
|
10 % of the issuer's capital
|
|
United Kingdom
|
10
|
5
|
20 % of the issuer's capital
|
|
USA
|
15
|
5
|
20 % of the issuer's capital
|
1 As reported in media, the new Double Tax Treaty between Ukraine and Cyprus has been negotiated and awaits execution. It will replace the Double Tax Treaty between Cyprus and USSR, which currently applies to Ukraine, as USSR's successor, providing for 0% WHT on dividend payments. It is expected that the new treaty will introduce the basic rate of 15% as withholding tax on dividends and a reduced rate of 5% in case of dividend payment to a shareholder with at least 25% equity in the payer.
securitization of assets
Known since 1970s securitization now represents one of the dominant vehicle for capital formation in the United States and increasingly throughout the world. It allows converting assets, such as bank loans and credit receivables, into marketable securities for sale to investors by means of sale on a non-recourse basis of such assets by a bank (originator) to a special purpose vehicle (SPV) set up domestically or in a tax friendly jurisdiction. An originator sells a portfolio of assets removing them from its balance sheet through a "true sale". The true sale test is a bankruptcy remoteness of the originator from the SPV -the buyer. Normally securitized assets should be in the amount of at least USD 100 mln.
Exhibit 6 shows the standard securitization structure.
Securitized assets may include, inter alia, residential mortgages, autoloans, leases (including automobile leases), and credit card receivables Securitization of such assets may be of interest to large Ukrainian banks, leasing companies, and trading houses as a financing risk diversification technique attracting immediate and relatively cheap capital. It appears that, under Ukrainian law, the concept of factoring may be successfully used, with proper adjustments, to implement the sale of liquid assets to a foreign or domestic SPV for certain consideration raised through the issuance of securities by the SPV.
The Ukrainian legislature has not enacted any securitization specific legislation and structuring a securitisation deal is to be based on, inter alia, the Ukrainian Civil Code, the Law of Ukraine on Securing Creditors' Claims and Registration of Encumbrances (the "Encumbrance Law"), and the Law of Ukraine on Mortgage (the "Mortgage Law").
Ukrainian law generally permits the transfer of receivables by the originator to either an off-shore SPV or Ukrainian company. It is suggested that such transfer is documented under the sale/assignment or a factoring agreement. To be a party to the factoring agreement, the Ukrainian company must be a registered provider of financial services. Whether this requirement applies to an off-shore SPV is to be further clarified, as the law is not quite clear in this regard. Under this approach and with carefully structured transaction documents D true sale legal opinSon, which is critical for the successful transaction, may be- possible.
Capital Markets
If the securitisation structure so requires (this will generally be determined by regulatory and tax considerations), a Ukrainian company acting as a de-facto SPV will be permitted to purchase the receivables. The transactional structure may require that the charter limits such company's activities by serving the purpose of securitization. The originator may be a shareholder/participant and appointed as manager of this company. However, if this route is selected and the originator becomes insolvent the liquidator/receiver may subject the sale/ assignment of the receivables to additional scrutiny as the transaction is between related parties. Besides, the bankruptcy remoteness may be achieved only if the originator is not a shareholder/participant.
For the factoring (sale/assignment) to be classified as a true sale the receivables being sold/assigned must be clearly identified in the factoring (sale/assignment) agreement and may require for the receivables to be individually listed in a schedule to the factoring (sale/assignment) agreement. Any related security that attaches to the receivables must be transferred with the receivables (and this will involve the relevant formalities being complied with). Otherwise there is a risk that such related security may be extinguished.
There are no prohibitions in the Ukrainian Civil Code relating to the assignment of future receivables under a factoring (sale/assignment) agreement or the appointment of the originator as a servicer of the underlying assets.
Generally, domestic loans do not require any regulatory approval for perfection while a cross border loan with a foreign lender needs to be registered with the National Bank of Ukraine (NBU). The law is silent as to the consequences of assignment of lender's rights under a domestic loan to a foreign SPV. Consequently, there is a risk of extending the NBU registration requirement to such assigned loan. Such extension may result in subjecting the securitized loans to the interest caps established by the NBU for the loans from foreign lenders. A separate clarification from the NBU may be sought to mitigate/extinguish such risk.
An off-shore SPV is obliged to pay the purchase price for the receivables within 90 days of the transfer of the receivables from the originator. The originator may be subject to penalty in the amount of 0.3% of the past due amount for each day of delay unless a relevant license from the NBU is obtained.
Pursuant to the relevant terms of the Ukrainian Civil Code the underlying debtors do not necessarily need to consent/be notified (unless the underlying agreements specify otherwise) for such assignment to be legal between the assignor and assignee. If such notification is not given, the assignment will not be valid with respect to third parties and any payment made by a debtor to an originator will be a valid discharge from its liabilities under the underlying agreements.
However, assignment of loans by the originating bank to the SPV may be viewed as a disclosure of client's confidential information to a third party, which is prohibited under banking data secrecy laws, unless a consent of such client is sought and except for requests of law enforcers. A solution may be to enforce law/regulation expressly excepting asset-backed financing from the scope of regulatory limitation (as in the US data protection law).
Except for the transactions with the mortgage notes, the sale/assignment of the receivables to an SPV requires that any security granted to the originator be re-assigned and registered in favour of the SPV. In case the relevant security agreements are notarized each assignment must also be notarized. Under the relevant provisions of Ukrainian law it is possible for the originator (through a single pledge assignment agreement) to transfer all rights to the underlying collateral to the SPV. The SPV will need to register as a new pledgee in the encumbrance register. The Mortgage Law allows the debtor to issue a mortgage note (zastavna in Ukrainian), to the mortgagee. In case of a mortgage note, the transfer of receivables may not be carried out by way of assignment (including factoring) of underlying obligation and may be performed only through endorsement of the mortgage note resulting in the transfer of the loan and mortgage to the SPV.
Ukrainian law does not specifically prohibit any form of credit enhancement and consequently, the originator or one of its subsidiaries may provide some form of first loss protection. Credit enhancement may be provided, inter alia, by: (i) the originator purchasing a subordinated tranche of securities; (ii) overcollateralisation; (iii) the originator providing a subordinated loan to the SPV; (iv) provision of a reserve fund (as a first loss account); or (v) originator/third party guarantee. However, as there is little precedent on this particular matter, any credit enhancement being provided by the originator will need to be carefully structured so as not to require any legal opinion being qualified.
Following the first successful securitization of mort-gaged-backed assets by Privatbank earlier this year, a number of leading Ukrainian banks have recently announced their intention to securitize pools of consumer finance receivables in the near future. A "true-sale" securitization will still be subject to complicated rules of Ukrainian collateral, currency control and banking regulations and its consistency remains to be tested in practice. On the other hand, benefits of securitization may be worth-while exploring the possibilities provided under Ukrainian law, in order to receive attractive financing alternative at reduced cost of funds as a result of segregation of the assets from the credit risk and higher credit rating of the securities issued by the SPV (which could be an obstacle for an unrated Ukrainian company in entering capital markets and issuing debt in its own name).
