Finance and Capital Markets Transactions for Ukrainian Borrowers: The Impact of the War
CEE Finance and Capital Markets 2022–2023.
1. Environment in the Country at War
The unprovoked Russian invasion of Ukraine, unprecedented in Europe since the end of World War II, has been a huge tragedy for the Ukrainian population as well as leading to a myriad of global financial and economic implications. The ongoing war has a direct impact on trade and investment channels and encompasses disruptions to:
(i) commodity markets (especially food and energy),
(ii) logistic networks,
(iii) supply chains,
(iv) foreign direct investment, and
(v) specific sectors.
According to the World Bank, world trade will drop by 1 per cent, lowering global GDP by 0.7 per cent and the GDP of low-income countries by 1 per cent in 2022. Beyond these direct effects, the war’s long-term implications for global trade and investment will largely depend on how governments respond to the changing geopolitical environment.
The war commenced by Russia against Ukraine created an enormous economic, humanitarian and refugee crisis in Ukraine. Towns and cities across Ukraine are bombarded by Russian armed forces and substantial Ukrainian territories are under de facto temporary occupation by Russian armed forces.
To manage the crisis, to the extent possible, martial law has been introduced in the whole country as of February 2022 and the Government of Ukraine and the Ukrainian Parliament continue to fulfil their duties despite the ongoing war. The Ukrainian economy faces extraordinary challenges which result from fiscal cash flow disruptions and huge expenses needed to cover critical defence, social and humanitarian costs. For example, the Government’s monthly expenses to finance the war amount to approximately USD 5-6 billion. Under these circumstances, economic and financial challenges are among the biggest challenges for the country. To combat this, proper engagement and cooperation with IFIs and other creditors to raise new financing and restructure existing debts becomes vital. A revived economy will massively increase the chances of Ukraine to maintain its core operations and rebuild its destroyed infrastructure.
2. Access to Financing
Ukrainian international partners, including EU, G7 and USA have committed to provide financial, military and humanitarian aid to Ukraine. However, even essential financial aid provided by foreign partners of Ukraine is not sufficient to tackle the challenges resulting from rapid GDP reduction. It is expected that Ukraine’s GDP will shrink by 30–45 per cent by the end of 2022.
Given that Ukraine’s sovereign Issuer Default Rating was downgraded by Fitch Ratings to single C in July 2022, international capital markets for Ukraine remain closed this year. Hence, the Government found themselves in financial difficulties with proper liquidity management seeming to be the only available option.
International capital markets and international financing opportunities remain closed for Ukrainian blue chips as well – most of the Ukrainian businesses have been significantly affected by the war, have lost some of their assets in the temporarily occupied territories, face cash flow reductions or continue operations whilst constantly needing to adjust their business models and adapt to the new environment. As most of the Ukrainian cities remain under bombardment by Russian missiles and artillery, and considering the low rating of the Ukrainian state, private investors and banks are not prepared to accept the risks of Ukrainian borrowers.
In this extremely challenging environment, leading IFIs, such as the EBRD and EIB have taken the lead in financing some Ukrainian companies which operate in strategic industry sectors.
In particular, the EBRD has been swift to condemn the Russian invasion of Ukraine on 24 February and has pledged to stand with Ukraine. In early April, the EBRD’s Board of Governors voted to suspend the access of Russia and Belarus to EBRD finance and expertise, and the Bank closed its offices in Russia and Belarus. The EBRD also adopted its EUR 2 billion Resilience and Livelihoods Framework by supporting countries affected by the war on Ukraine. Within Ukraine, the Resilience and Livelihoods Framework will focus on four main elements:
(i) payment deferrals, debt forbearance and restructuring,
(ii) trade finance, including for fuel imports,
(iii) emergency liquidity finance in coordination with partners, and (iv) emergency reform, to support the Ukrainian authorities with immediate legislative and regulatory interventions.
The EBRD has been financing Ukrainian companies whose operations are vital for Ukraine’s survival during war time. For example, the EBRD granted EUR 20 million to a leading Ukrainian pharmaceuticals manufacturer, JSC Farmak to cover its working capital needs, support production and improve access to essential medicines for people living in Ukraine. Supporting the pharmaceutical sector during the war in Ukraine is a key element of EBRD’s five-pronged support plan for the economy of Ukraine and the surrounding region. The EBRD is also supporting trade, energy security, vital infrastructure and food security.
Moreover, in June 2022, the EBRD signed a loan facility agreement with Naftogaz, the biggest gas producer and supplier in Ukraine, envisaging that the EBRD intends to lend up to EUR 300 million, out of which EUR 50 million will be available for emergency gas purchases. The loan should be used to purchase natural gas to fully meet the demand of Ukrainian energy consumers. The loan agreement is secured by the sovereign guarantee of Ukraine.
The EBRD will be sharing the risks under the Resilience and Livelihoods Framework with their partners – the European Union and the European Fund for Sustainable Development.
The European Investment Bank (EIB), in its turn, announced a EUR 4 billion program for 2022 and 2023 to help cities and regions in EU Member States by addressing urgent investment needs to meet the challenges of welcoming and integrating war refugees from Ukraine. The new EIB program aims to finance the development of key social infrastructure for the provision of public services to refugees, including housing, schools, hospitals and kindergartens. The financial support will be complemented by advisory support, helping local authorities in EU Member States with free technical assistance to assess local needs rapidly, and plan, prioritise and prepare the related investments.
Moreover, in March 2022 the EIB Board approved the 1st EIB Solidarity Package for Ukraine. As part of that package, in the period from 8 to 25 March 2022, the EU Bank disbursed EUR 668 million of urgent liquidity support to the Government of Ukraine – to enable the Ukrainian Government to continue providing critical public services for citizens which remain in Ukraine. These funds are foreseen to support transport, energy, urban development and digital projects.
In July 2022, the EIB provided financing to Ukraine on favourable terms as part of the 2nd EIB Solidarity Package in the amount of EUR 1.59 billion to help Ukraine repair the most essential damaged infrastructure and resume critically important projects, hence, addressing the urgent needs of the Ukrainian people. The second package of support for Ukraine under the EIB Ukraine solidarity urgent response was developed in close cooperation with the European Commission.
The second relief package under the EIB Ukraine solidarity response is supposed to help essential services to resume and get the most critical infrastructure up and running again, strengthen the country’s resilience and maintain economic stability. It consists of two blocks of intervention:
(a) Immediate financial assistance totalling EUR 1.05 billion. This will consist of upfront disbursements under eight existing finance contracts. It will help the Ukrainian government to cover priority short-term financing needs, provide support to strategic state-owned companies, ensure urgent repairs of damaged infrastructure, resume the provision of disrupted municipal services, and support urgent energy and energy efficiency measures in preparation for the cold season.
(b) Resuming implementation of EIB-financed projects in Ukraine totalling EUR 540 million, where possible, excluding areas of active hostilities and territories not controlled by the Ukrainian government. The selected projects will cover energy, energy efficiency, roads, transport, education and infrastructure, as well as reconstruction and recovery programmes. The exact timing of these disbursements will depend on the state of advancement of underlying projects.
3. Capital Markets Transactions during War Time
The extreme challenges for Ukraine and significant war- related risks are not acceptable for foreign lenders and investors, thus, Ukraine and its companies have not been able to raise new funding in the international capital markets since the beginning of the war in February 2022. To manage liquidity of the state-owned enterprises, several consent solicitation procedures were launched in summer 2022.
In particular, consent solicitation procedures launched by the State, by Naftogaz, the biggest gas producer and gas supplier in the country, by Ukrenergo, an electricity transmission system operator in Ukraine and the sole operator of the country’s high-voltage transmission lines, and by Ukrautodor, the state road agency of Ukraine, matched the proposal of the State. All three state-owned enterprises launched their consent solicitation procedures on the identical terms with the State, requesting a two-year deferral of maturities and interest payments across each series of outstanding notes. No consent solicitation fee was offered, and the waiver of covenants was limited to the bare minimum.
The State proposal has been endorsed by global creditors, including the Paris Club. As of the date of this publication, the consent solicitation proposal of the State was supported by the creditors who have demonstrated a phenomenal level of understanding, unity and desire to assist Ukraine in the war. Hopefully all three major state-owned enterprises will receive the same level of unwavering support from the creditors. To implement successful consent solicitation procedures and avoid a default, it was necessary to engage with many financial and commercial creditors on a bilateral basis to obtain various waivers, forbearance or amendment agreements in respect of the relevant obligations under facility agreements and material commercial contracts.
Ukraine and its state-owned enterprises declared their intention to continue working with their international partners and creditors to ensure strong global support and growing financial assistance, which is vital to end the war and to rebuild Ukraine afterwards.
Major private Ukrainian companies have also been able to demonstrate successful engagement with their creditors. For example, Ukrainian poultry producer MHP launched a consent solicitation proposal in March 2022 – to defer repayment of principal and interest under Eurobonds, after the company missed the deadline for the coupon repayment. MHP had to preserve cash, having faced a number of huge disruptions to its business resulting from Russia’s invasion in Ukraine. The holders of the notes voted in favour of the proposal.
4. Post War Rebuild of Ukraine
The rapid response of the Ukrainian Government to the extreme challenges of the war, the governments cooperation with IFIs, other creditors and Eurobond holders, as well as the coordinated efforts of state-owned enterprises and the cooperation between creditors and Ukrainian “blue chips” has already led to some positive results. In particular, the EBRD has pledged to help finance Ukraine’s reconstruction once conditions permit. EIB, the lending arm of the European Union, proposed to create a funding structure, involving an EU-Ukraine Gateway Trust Fund, which should help allocate up to EUR 100 billion to finance rebuilding bridges, renovating water and wastewater services, particularly in the cities most affected by the war, facilitate Ukraine’s exports, support Ukraine’s energy and digital infrastructure sectors, as well as small and medium enterprises.
Hopefully international creditors which consented to the deferral of payments by Ukrainian borrowers in these challenging times, will be able to benefit from future investments into dozens of important and profitable projects and will play a key part in rebuilding Ukraine in the near future.