Some Notable Transactions and Trends of 2018

Last year was marked by an increased number of large cross-border transactions involving Ukrainian parties or Ukrainian assets. This shows that complex transactions, often requiring careful planning and structuring and which are not easy to execute, can and are being done on the Ukrainian market.

Good examples of complex international transactions from 2018 are acquisition of Mriya group by SALIC and Metinvest refinancing, in both of which Redcliffe acted. In particular, acquisition of Mriya Group companies was one of the most anticipated and complex transactions in the Ukraini­an agribusiness sector to date. The target was a very large group with many assets but also highly-leveraged and with certain historic problems stemming from how it was managed by previous shareholders; it was on the brink of insolvency. The transaction documents, besides an SPA, included a number of other substantive agreements, designed to capture the complexities of this acquisition. In particular, important transitional/post-closing arrangements were agreed and had to be properly documented. Many international banks and the International Finance Corporation were stakehol­ders in the pre-acquisition restructuring and in the subsequent transaction itself.

The Eurobonds` placement by Metinvest under the 2012 Eurobond refinan­cing programme and pre-export finan­cing (PXF) facility is also worth mentio­ning. In combination with the issue of USD 1.592 billion worth of new bonds by Metinvest B.V., this is the largest ever refinancing of a Ukrainian corporate group. This is the second large debt restructuring of Metinvest group. The first was successfully completed in autumn 2017.

We saw continued interest from fo­reign investors on the Ukrainian rene­wable energy market. In particular, se­veral cross-border transactions took place with respect to large Ukrainian wind farms, such as providing a EUR 155 million secured term loan from, in particular, EBRD and NEFCO and J.P. Morgan Securities Plc, to the Ukrainian project company SyvashEnergoProm to fund the construction of the first phase of a 250 MW wind power plant. The sponsors investing in the project company are the Norwegian developer NBT AS and French-based independent power producer Total Eren. The overall cost of the project is EUR 380 million, making the project the biggest investment in the renewables energy sector in Ukraine to date. We expect this trend to continue, in both wind and solar projects. As one example, NBT, a Norwegian wind farm developer, is planning to develop a wind farm with the expected capacity of 750 MW in Zaporizhzhya Region. The estimated value of this project is EUR 1 billion.

Apart from agriculture and renewab­les, the traditional energy sector may be gaining momentum as well. Tenders have recently been announced for a few oil & gas production sharing agreements with attractive incentives for investors. We might see a comeback by large international oil & gas producers in the next few years.

There is still work to be done but conditions for doing business have improved. The World Bank ranked Ukraine 71 in its Doing Business index, which is 5 points higher than in 2017. Also, Ukraine improved its position in the Competitiveness Index of the World Economic Forum.

Legislation Affecting Cross-border Transactions

Foreign clients often ask us how capital can be moved across the border and particularly, how their investment can be repatriated home.  In this context, the following is worth mentioning:

(a) Latest novelties in Ukrainian currency control legislation aimed at de-regulating and removing previously existing restrictions and barriers. Thus, the Currency Control Law of 21 June 2018, effective as of 7 February 2019, introduces the following novelties:

(I) abolition of individual licences of the National Bank of Ukraine (NBU). Instead, there is a statutory cap for cross-border transactions — EUR 2,000,000 per year for legal entities and EUR 50,000 for individuals, with certain exceptions;

(II) replacement of the maximum interest rate (cost of funding cap) for cross-border loans with general financial monitoring;

(III) the possibility to accumulate and hold funds in foreign currency;

(IV) the possibility to open current accounts in Ukraine by non-residents, as opposed to the only possible option of investment accounts;

(V) settlement period for export/import transactions is extended from 180 days to 365 days after customs clearance;

(VI) the abolition of the restriction on early redemption of external funding obligations; and

(VII) lifting sanctions in the form of termination of foreign economic activity for breach of settlement deadlines.

(b) In June 2018 Ukraine signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the MLI) within its obligations in accordance with the BEPS plan adopted earlier. MLI has been ratified by Parliament in February 2019. MLI introduces the Principal Purpose Test (PPT) — a general anti-abuse rule denying the benefits of a double taxation treaty (DTT). In particular, according to the PPT, a benefit under the existing DTT shall not be granted in respect of income or capital if it is justified that obtaining such benefit was one of the principal purposes of the transaction that resulted in that benefit. Taking into account such a broad definition, this test may affect almost all cross-border transactions with the participation of Ukrainian parties and make most of the tax benefits under relevant DTT unavailable for all parties of the relevant transaction. Accordingly, an international transaction will require proper structuring in view of the MLI.

(c) Sanctions Law of 14 August 2014 imposes certain restrictions for persons that have been sanctioned pursuant to this law. In particular, transactions with shares of sanctioned persons may be banned or the Antimonopoly Committee of Ukraine (AMCU) may not issue the required merger clearance. Also, sanctioned persons may be precluded from participating in privatisation tenders of Ukrainian state-owned companies or public procurement tenders in Ukraine. Therefore, it is of particular importance to correctly  determine whether the parties, the target or any of their respective rela­ted companies and individuals, are subject to Russia-related sanctions imposed by Ukraine, U.S. and the EU.

(d) Ukrainian banks deem operations involving certain states as risky and may apply increased scrutiny or suspend client operations with such states in certain cases. These states include:

(I) states on the list of offshore countries approved by the Government;

(II) states which do not conduct ­anti-money laundering activity or acti­vity related to combating financing terrorism;

(III) states that finance circulation of weapons of mass destruction, etc.

This should also be double-checked prior to proceeding with a tran­saction.

(e) The new Privatisation Law of 18 January 2018 imposes certain restrictions in terms of the buyers of privatised facilities. Such buyers must not be related to the aggressor state in the meaning of Ukrainian sanctions legislation, as well as companies incorporated in countries considered as non-cooperative accor­ding to FATF standards, or entities where such companies hold 50% or more. On the other side, the Privatisation Law allows the execution of sale and purchase agreements within the privatisation process under English law and settle disputes via arbitration, which makes the privatisa­tion process more transparent for foreign companies.

Although there are certain areas requiring significant improvement from the perspective of investors, such as the judicial system, further lifting of bureaucratic burdens and efficient measures for combating corruption, the recent developments make cross-border transactions involving Ukraine doable and easier to implement.