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Controversy stirred up by the Ukrainian central bank’s scheme to limit the cost of foreign borrowing by domestic companies may delay implementation of the plan until early 2008. A new cap on the maximum cost of foreign debt raised by Ukrainian borrowers is scheduled to come into force on 19 October but may not take effect until next January, said a source at the National Bank of Ukraine (NBU).
Earlier this month, the NBU passed a resolution limiting the maximum interest rate, including fees, payable on Ukrainian borrowers’ foreign-currency bonds and syndicated loans to 200bps over the average yield of Ukraine’s three- to five-year sovereign bonds. The rolling figure will be calculated using average sovereign yields from the previous two quarters and would cap margins on external issuance at around 9% based on current trading levels, said several sources at Ukrainian banks.
The new legislation sparked considerable opposition from the heads of international funding at several Ukrainian banks – the most frequent visitors to international debt markets. The changes are too restrictive, they said, and the regulation may prompt some borrowers to shorten their debt-maturity profiles, increasing the risk that they will not be able to refinance short-dated foreign debt when needed.
“Some of the banking lobby may well try to have the regulation delayed or amended,” said a banking source. “There is no clear differentiation between ceilings for different debt maturities, and the level of foreign debt relative to Ukraine’s GDP is still far from critical.”
Private sector foreign-currency debt in Ukraine amounted to roughly 33% of GDP – or USD 38bn – in 2006, according to an International Monetary Fund report. That compares to a 27% ratio for Russian companies, according to data from the Russian Central Bank.
“The rationale behind the decision is to limit the growth of foreign borrowings [by Ukrainian companies] and to lower the cost of foreign debt,” the NBU source said. “We plan to review the cap every six months, so it makes more sense to introduce it in January 2008.”
Collateral damage from the central bank’s strategy to lower the cost of foreign debt will outweigh any benefit, according to the head of funding at a second-tier Ukrainian bank. “The regulation will not be helpful at all,” he said. “It will force us to issue short-term debt and will cut off our access to long-term international bond markets, which we need to reduce our liquidity mismatches.”
Current rules cap the cost of foreign debt for Ukrainian companies at 9.8% for maturities of less than one year, at 10% for one- to three-year debt and at 11% for longer maturities. The cost of floating-rate foreign debt is limited to three-month Libor+ 750bps.
“Syndicated loans, bilateral loans, private placements and other foreign borrowings will be unavailable for almost all potential Ukrainian borrowers because the maximum interest rate should be calculated including all fees, penalties, default interests and other expenses,” said Ivan Levkivskyy, head of debt origination at UkrSibbank in Kiev.
Recent Eurobond issues by some of Ukraine’s smaller banks have already come close to the existing cap on foreign funding costs, said the London-based lawyer. “Deals priced recently with coupons of 10% or higher are close to that limit,” he said.
Ukrainian banks provide home buyers with 25-year mortgages but increasingly rely on retail deposits with maturities of one or two years for funding, said Oleg Babur, head of international relations at Ukrsotsbank. Such deposits can be withdrawn by individuals at any time, he added.
“International debt capital markets are a much-needed source of stable, long-term funding and limiting access would run contrary to the other declared goal of the regulator: to improve maturity gaps in the system and increase overall long-term liquidity,” Babur said.
Ukrsotsbank is one of the country’s top five banks, with assets of UAH 21.5bn (USD 4.2bn) at the end of May, according to data from the Association of Ukrainian Banks. Ukrsotsbank, which issued three-year Eurobonds at 8% in February, is unlikely to be affected by the cap, Babur said.
A source at a smaller bank said it has brought forward its borrowing timetable in an attempt to raise US dollar-denominated debt before October, while its lawyers look for a loophole in the new rules.
The source at the NBU said the cap would apply to all deals in major foreign convertible currencies – including US dollars, euros and sterling – that involve credit from a foreign financial institution to a company resident in Ukraine.
The changes are intended to limit the cost of all cross-border borrowing by Ukrainian corporates and banks and will affect syndicated loans and Eurobonds, according to one London-based lawyer who has worked on several Ukrainian bond issues this year.
Ukrainian banks raise debt in international bond markets through loan participation notes, or LPNs. Under this structure, a foreign bank lends money to a Ukrainian bank and the loan is funded by issuing LPNs to investors.
“LPN structures are used to avoid withholding tax, but also because NBU regulations state that a Ukrainian bank can only borrow from another bank or non-bank financial institution,” the lawyer said.
Local banks could issue foreign-currency debt via special purpose vehicles (SPVs) registered outside Ukraine, he said but the on-loan from SPVs to the borrowers would still be treated as a loan by the NBU and would accordingly be subject to the regulations.
Levkivskyy at UkrSibbank did not rule out the possibility of issuing foreign debt directly rather than through LPNs, but said it would be more complicated and expensive. Some banks will rely more on their parent companies for foreign-currency debt and the domestic market will become a more important source of funding, he added.
“Borrowers will have to register their costs of borrowings with the NBU and counter-sign the applications, attesting to the accuracy of the margins,” said a Kiev-based debt capital markets lawyer. “And whereas previously Ukrainian financial institutions did not have to register foreign debt with a maturity under one year, now they will have to register anything longer than two days.”
This registration must be completed before funds are drawn down, said a banking source, who described the procedure as burdensome and complicated.
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