Negotiating the Impact of the Financial Crisis on International Financing
The world financial crisis which reached Ukraine in autumn 2008 brought adverse material changes in the economic sector in general and seriously disrupted the banking and financial area in particular.
During the first months of the crisis the USD exchange rate kept growing on the currency market, incurring continuous instability. The granting of loans was frozen.
The banks suffered significant bad debts on most loans which had been made available before the crisis, as well as certain difficulties with respect to their subordinated loans.
A couple months later most of them could hardly maintain capital adequacy ratios at the level required for international transactions.
On these grounds the following trends appeared in the banking and finance sector:
I. Emerging and Strengthening of Private Equity Funds
Traders were still experiencing a lack of financing by banks and even more required facilities for purchase and sale. Thus, private equity funds which invest pooled funds directly in private companies were an emergency exit. Notwithstanding that private equity funds more often invest in fresh business ideas, new technologies, expanding working capital, and making asset acquisitions, traders managed to attract them to foreign trade financing.
II. Recapitalization of Banks
Intending to save the banking sector, the Cabinet of Ministers of Ukraine, the National Bank of Ukraine (NBU), the World Bank, the International Monetary Fund (IMF) and the European Bank for Reconstruction and Development (EBRD) were involved in developing a recapitalization strategy. The strategy implied:
— examination of the loan portfolios of the specified large banks with respect to capital shortfalls and losses,
— changing of corporate governance and control providing that the government injecting funds into a bank receives corporate control under that bank and appoints its own nominees to corporate boards,
— own debt restructuring and liability management conditioned by the high priority goal of bank recapitalization to satisfy the claims of depositors and secured creditors,
— releasing funds for re-purchasing the shares and returning the bank to the private sector when the financial situation stabilizes.
At this stage, the recently recapitalized banks — Rodovid Bank, Ukrgazbank and Bank Kiev — are now negotiating terms and conditions of the debt restructuring with their creditors to meet the government’s requirements.
III. Debt Restructuring
In Ukraine, debt restructuring is better known as restoration within bankruptcy proceedings (mandatory). At the same time, in developed countries this mechanism has spread beyond bankruptcy proceedings, and is being employed by both, banking and private sectors (voluntary).
Mandatory debt restructuring is performed upon a court decision and in accordance with the On Restoring a Debtor’s Solvency or Recognizing it Bankrupt Act of Ukraine of 14 May 1992. And the debt restructuring process looks as follows:
Appointment of an asset administrator.
The court-appointed administrator disposes and secures (if necessary) the assets of the debtor and takes all related decisions at his/her qualified discretion from the date of the appointment.
The court decision on financial restructuring (restoration).
If the creditors intending to restore the debtor’s solvency are found, the court may take a decision on the debtor’s restoration for a period of up to twelve months (may be extended by six months by the creditors’ committee).
At the same time, the court-appointed administrator shall, within three months from the court decision on restoration, develop a restoration schedule.
Restoring the debtor’s solvency.
A restoration schedule may, inter alia, include arrangements on debt restructuring. Thus, if the debtor does not have available assets to satisfy all existing claims, the debt restructuring provisions in the restoration schedule may provide for deferral of payments and/or payment in instalments.
Voluntary debt restructuring may be employed only in the event of mutual consent of the parties (the debtor and the creditor).
There are three trends in voluntary debt restructuring:
Issuing a bill of exchange.
The debtor and the creditor may substitute the existing obligation of the debtor to repay the debt for a bill of exchange confirming the debtor’s obligation to perform payment of the specified amount in the future.
However, according to applicable Ukrainian legislation, the bill of exchange may be issued only for goods purchased or services (works) rendered. Thus, business entities apply this mechanism quite rarely.
Executing a settlement agreement.
The parties to the loan agreement may execute an agreement providing for full (mostly, uncollectable debt) or partial writing off an existent debt under terms and conditions acceptable to all parties (i.e. debt-for-equity swap).
Amending the terms and conditions of an agreement.
This mechanism became the most common in the last six months. It provides for the mutual consent of the parties to amend and restate material terms and conditions of the existing agreement.
As a rule, the parties implement such amendments through
(i) an addendum to the basic agreement, (ii) a special deed on amendment, or (iii) execution of a restated agreement. However, the essence of each of them is the same.
Thus, the NBU’s Board adopted Regulation On Measures Regarding Furnishing the Loan Repayment of 3 June 2009, No.328. This Regulation prescribes recommendations for commercial banks regarding the fundamentals of debt restructuring. The Regulation refers to debtors other than banks. However, certain provisions are common for cross-border debts (including subordinated loan).
What are common terms and conditions of such agreements?
Waiver of default. Generally, the creditor’s and the debtor’s intention to restructure the debt is conditioned by an existing and continuing default of the latter. Therefore, the agreement is to wave the existing default, which means releasing the debtor in full or in part from the liability for the losses and damages suffered by the creditor as a result or in connection with such existing default.
Extension of the maturity date. According to common world practice the period of extension of the permanent maturity date does not exceed two years.
The grace period means a period of time during which either:
— interest on the outstanding principal amount is not accrued,
— overdue interest (penalty) is not applied,
— a debtor may defer the repayment of the outstanding principal amount and/or an interest accrued.
Repayment schedule. The extension of the maturity date and granting of a grace period require respective changes in the repayment schedule. As a rule, the schedule establishes monthly or quarterly interest repayment and quarterly or semi-annual principal debt repayment.
Interest. Furthermore, the parties may agree to a discounted interest rate applicable to an outstanding principal amount until the maturity date or other specified date (i.e. during the grace period).
Other terms and conditions. The creditors often require an affirmation that there is no preference to any other creditor and no restructuring terms and conditions are materially more advantageous. Moreover, the creditors of the recently recapitalized require the ensuring of specified capital adequacy ratios, shareholders equity and the amount of aggregate financial indebtedness.
IV. Securitization of Debts
Securitization of debts is also becoming widespread. Thus, a company having a number of debts issues debt securities (i.e. debenture bonds) to shift the existing debt with such debt securities. This mechanism is quite easy to implement in Ukraine, given that the Ukrainian tax authorities do not employ a thin capitalization model (i.e. as employed in Russia).
V. Debt Consolidation
Along with debt securitization, debt consolidation is also being extended. It assumes obtaining one loan to repay many others. The terms and conditions of the new loan are usually more advantageous.
Thus, based on the foregoing, new trends in international financing may be described in the following way: investments in foreign trade by private equity funds, securitization of debts and debt consolidation, recapitalization of the largest banks by the Ukrainian government and the expansion of voluntary debt restructuring (mainly, subordinated loans). Debt restructuring is an important and economically reasoned condition for stabilization of the banking system and returning a favorable climate for international financing.