The capital markets in Ukraine have been a sleeping topic until recently. On June 19, 2020, the Ukrainian Parliament has restated the Law of Ukraine on Capital Markets and Organized Commodity Markets (Law). The restated Law became effective in July 2021, introducing a whole new framework for the issue of securities in Ukraine. It implements the most important EU capital markets regulations, including MiFID II, MiFIR, and CRD IV.
One of the key developments of the Law is that the issues of the bonds have been largely aligned with the procedure followed on international capital markets. In particular, it has introduced a number of changes aimed to protect the bondholders’ rights in the most efficient manner. The changes introduced include, among others, (1) strict disclosure requirements applicable to the issuers, (2) procedures for the bondholders’ meeting and the exercising of the bondholders’ collective rights, (3) the introduction of the concept of the administrator of the bond issue, which is similar to the concept of the bond trustee in the common law jurisdictions.
Local Bonds – What to Expect
After the adoption of the Law, the interest for local bonds issued in Ukraine has increased significantly. However, despite the readiness of the market to test the new framework, quite a few stoppers are still on their way.
The Law provides for the framework regulation of bond issuances in Ukraine. Namely, it introduces key concepts and principles for the issue of local bonds. However, a detailed procedure for the issue of the bonds must be established by the secondary legislation.
As of now, the secondary legislation reflecting the described developments introduced by the Law has not been adopted yet. At the same time, old secondary legislation regulating the issues of the bonds remains in full force and effect and has to be complied with. This creates a situation where the issuers aiming to issue local bonds have to maneuver between the old and the new legislative frameworks.
Despite these problematic aspects, there have been precedents on issuing local bonds after the amendments introduced by the Law. However, those issues were made under the private placement procedure. The public offerings of the bonds have not yet been tested in practice since the Law has entered into force.
Taking into account the existing tendencies and the increased interest of market participants, we anticipate that the fully-fledged Ukrainian local bonds market may kick off in 2022.
Eurobonds by Ukrainian Issuers – Present Trends
Until recently, all Ukrainian issuers (other than the state of Ukraine) had to apply the loan participation notes structure (LPN) for eurobond issuances out of Ukraine. The LPN structures were widely used by state-owned entities, such as Naftogaz of Ukraine, Ukrainian Railways, and Ukreximbank. For the last few years, there were two key reasons why a direct eurobond issuance was not a viable option for Ukrainian entities: (1) currency control restrictions and (2) tax considerations.
In April 2021, the Ukrainian currency control regulations were amended to allow repayments under the debt securities outside of Ukraine, to the applicable annual limit for the cross-border transactions established by the National Bank of Ukraine (which equals EUR 2 million as of today). Such changes had a positive impact on Ukrainian issuers’ ability to make a direct issue of eurobonds from Ukraine, however, did not resolve all applicable concerns.
Ukrainian law does not exempt payments of Ukrainian sourced income under eurobonds from the standard withholding tax regime. On the contrary, the LPN structures allow applying a 5% reduced withholding tax rate, subject to compliance with certain criteria. Thus, the LPN structures remain a better solution for the Ukrainian issuers, subject to one exception. In cases where the anticipated eurobond issuance is benefiting from a state guarantee, the direct issue could be a viable option. Payments of interest income under borrowings supported by sovereign guarantees are exempt from Ukrainian withholding tax, therefore tax considerations are not applicable to issuances made under the state guarantee. A great practical example of the direct issue structure is a debut eurobond issuance by the State Agency of Motor Roads of Ukraine (Ukravtodor).
Thus, despite the changes to the local framework indeed improving the conditions for the direct issue of eurobonds from Ukraine, there is still some work ahead before the LPN structures become a thing of the past. We are, however, quite optimistic that Ukrainian legislation is moving in the right direction.
By Glib Bondar, Senior Partner, and Anastasiya Voronova, Senior Associate, Avellum