• Vsevolod Volkov

    Partner, EVERLEGAL


Address: 4 Rylskyi Lane, Sofyiska Square, 6th Floor, Kyiv, 01001, Ukraine

Tel.: +380 44 337 0016

Fax.: +380 44 337 0018

E-mail: info@everlegal.ua

Web-site: www.everlegal.ua

EVERLEGAL is an independent and sector-focused Ukrainian law firm with particular expertise in Energy & Natural Resources. Our mission is to be a legal business partner for our clients and to facilitate your progress and get your jobs done.

The EVERLEGAL team is a synergetic combination of professionals from international law firms and local legal experts. We advise our clients on transactional matters with a focus on corporate finance, dispute resolution (in courts and via ADRs) and legal aspects of business operational matters. We feel equally comfortable when advising on complex cross-border deals or representing your interests in domestic courts or foreign arbitration fora and jurisdictional bodies against tough counterparties. Our offering covers Corporate and M&A, Dispute Resolution (Courts and ADRs), Antitrust/Competition, Banking & Finance and Commercial Matters. We are also experienced in Drafting Legislation.

EVERLEGAL’s clients encompass industry leaders with global brands, mid-size and growing businesses as well as innovative start-ups. Our lawyers have experience and expertise in a range of sectors such as Energy & Natural Resources (with special focus on RES), Agriculture, IT and Telecoms, Healthcare, Infrastructure, Financial Institutions and Consumer Goods.

EVERLEGAL’s motto is “Ever More Success”. We measure that success by how successful our clients are in achieving their business goals. We get your jobs done.

Securitization in Ukraine — Who’s Going to Be Next

Ukraine has little experience of securitization. It is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, car loans or credit card debt obligations and selling their related cash flows to third party investors as securities. Privatbank was the pioneer in this field by carrying out two securitizations back in 2007 and 2008. Those were securitization of residential mortgages and car loans. Although at the time a couple of other banks were preparing further securitizations of their residential mortgages and car loans, those transactions did not proceed because of the credit crunch. Many people believed that the credit crunch itself was caused partly by securitizations, because a number of securities issued in the course of securitization were not properly rated and this caused a number of lawsuits against rating agencies back in 2009. Nevertheless, securitization transactions continued after the credit crunch, although on a much lower scale. Today, and over ten years has passed, it might be worth considering whether this instrument can be revived for Ukrainian businesses and whether there is a room for Ukrainian issuers on this market.

Securitization is considered a financial instrument for pooling different sorts of receivables and selling their related cash flows to investors through the issue of bonds or other type of securities. Investors are being paid out of the proceeds of respective receivables, both principal and interest proceeds. The receivables which are most suitable for securitization are usually different sorts of loans, such as residential mortgages, commercial mortgages, car loans, credit card debt obligations, diversified payment rights, etc. For this reason, the most frequent users of securitizations were banks and financial institutions. Securitizations can also be used for non-debt receivables, such as trade receivables, utensils receivables and this instrument may also be available to ordinary commercial entities provided that they are able to generate a sufficient pool of eligible receivables.

A typical securitization transaction has the following structure. The entity owning the receivable is called the originator. The receivables are purchased from the originator by a special purpose vehicle (SPV), which also issues securities that are distributed among investors. One of the most important structural elements in securitizing is to ensure that the SPV is not exposed to the originator’s insolvency and, therefore, for the transaction to work properly such SPV must be an orphan. That is, it shall not belong to an originator and ideally it shall not belong to anyone who may be exposed to the risk of insolvency. Usually such SPVs are registered to pursue a charity or other similar purpose. This is required to make sure that the assets of the SPV (receivables which are purchased by the SPV from the originator) do not consolidate with the SPV’s owner should it go into insolvency.

Such a structure enables the pursuit of one of the main purposes of securitization transactions. Whereas the originator sells its debt receivables to a SPV, the originator removes its debt from the balance sheet and substantially improves its debt related ratios.  There are a lot of other advantages of securitizations for the originator. In particular it may allow funds to be attracted at a much lower cost, whereas the receivables may be rated higher than the originator. It also enables the originator to lock its profits at the date of the transaction and increases the liquidity of the originator.

The extent to which securitization transactions are available or bankable for Ukrainian origination was and remains an issue for Ukrainian currency controls and whether the respective receivables are denominated in Ukrainian hryvnia or in foreign currency. In the past one of the main obstacles for securitizations of Ukrainian foreign currency denominated loans was the requirement to register with the National Bank of Ukraine any transfer of such loans to an offshore SPV. Whereas many domestic loans had an interest rate above the interest rate cap established by the National Bank of Ukraine, such registration and transfer of receivables to a foreign SPV presented quite an obstacle in addition to logistical formalities involved in the registration.

With adoption of the Law of Ukraine On Currency and Currency Operations the situation with transferability of foreign currency loan receivables has improved, but it still remains uncertain.

The registration requirement has been replaced with the requirement to notify the National Bank of Ukraine. Since the National Bank of Ukraine now does not have discretion whether to register a fo­reign currency loan kept by non-residents, the logistical difficulties have decreased substantially. On the other hand, following such transfer of a loan to a non-resident SPV, the Ukrainian bank servicing the loan is still under an obligation to make its evaluation as to whether the terms of the loan, including the loan’s pricing such as interest rates and commissions, are up to the market. Although the National Bank of Ukraine has released certain guidance as to how such evaluation can be made, the guidance remains very general and does not account for many aspects and diversity of factors affecting the pricing of loans. As evidenced by initial experience in ma­king evaluations as to whether the terms of the loans form non-residents are up to the market, Ukrainian banks are very conservative, and in a transfer situation they often conclude that the terms of the loans are not up to the market. Although the intentions of the currency control reform in Ukraine were liberal, the practice of its application is that it has created additional uncertainties, decreasing the bankability of Ukrainian securitization deals. On the other hand, it can be said that at present Ukrainian banks and commercial entities do not generate a sufficient volume of foreign currency receivables and of such quality that could be eligible for securi­tization.

There are, however, quite a number of receivables denominated in Ukrainian hryvnia and which in terms of their qua­lity might meet securitization requirements. Examples of such receivables may include payments for gas and electricity supplies, certain commercial receivables and credit card payments. Given the volatility of the Ukrainian hryvnia’s exchange rate and the considerably high risk of hryvnia investments, it seems natural that these sorts of receivables shall be considered for domestic securitization deals rather than for international transactions. Whether Ukrainian securitization deals are doable on a domestic level remains a topic for discussion, especially since there has been no previous experience of such transactions.

One of the main requirements that make domestic securitizations difficult is the requirement that Ukrainian companies may issue interest bearing bonds or discount bonds only in the amount which is less than 3 times the value of their equity capital, or which is within the value of collateral or other security provided for such bond issues from third parties. Whereas in a securitization transaction the originator itself cannot guarantee any bonds issue by the SPV in order to avoid consolidation at the originator’s possible insolvency, any investments into the SPV participating in the securitization deal shall be structured as bearing the elements of equity and the elements of bonds. It is not wise to allege that this is something not doable, but this definitely requires certain creativity and risk mitigation structures.

Given the difficult situation Ukrainian companies are in as to raising funds abroad, and the fact that in the current market raising financing in Ukraine is often possible at lower costs than doing so offshore, it seems reasonable that Ukrainian corporates and banks will look more closely at the internal market. The regulatory requirements for carrying out securitization in Ukraine are not as perfect as many would like them, though they do not make securitizations not doable, which means that this funding option will be explored further.