The EBRD in Ukraine Experience and Expectations for

The EBRD in Ukraine Experience and Expectations for 2012 December 8 th 2011, Lviv Graeme L. Hutchison EBRD Deputy Country Director

The EBRD

Who is the EBRD? l The European Bank for Reconstruction and Development is an International financial institution, promoting transition to market economy in 30 countries from Central Europe to Central Asia l Owned by 61 countries and 2 institutions l Capital base of over € 30 billion l Head office in London, UK l Highest possible AAA credit rating

Global Shareholder Structure 2010 Annual Meeting: 50% capital increase to € 30 billion l l Current paid in capital is € 6 billion including an increase of € 1 billion in May 2010 Current callable capital is € 15 billion In 2010 the Board of Governors approved a 50% increase in the Bank’s authorised share capital from € 20 billion to € 30 billion The € 10 billion increase* will provide additional investment capacity for the period 2011 -2015 to enhance the Bank’s response to the global crisis * Callable capital to be increased by € 9 billion upon receipt of subscriptions from members, with the provision to review its usage after 5 years As at 1 September 2010 (1) Includes European Community and European Investment Bank each at 3%; France, Germany, Italy, UK each at 8. 6% (2) Russia at 4%

EBRD Investments l l l Reconciled as at 31 December 2010 Net cumulative business volume l Invested over € 62. 0 bn in more than 3, 119 projects since 1991 Private sector > 79% of EBRD finance Debt 83%, Equity 17% of EBRD finance € 9. 0 bn invested in 2010 Annual business volume (ABV) € billion

What are the EBRD’s Objectives? l l Promote transition to market economies by investing mainly in the private sector Mobilise investment Support privatisation, restructuring and better municipal services Encourage environmentally sound and sustainable development

The EBRD in Ukraine

EBRD in Ukraine – first 20 years l Largest financial investor in the country with almost 20 years of experience in the local market l Ukraine is the Bank’s second largest country of Operation (after Russia) l Clients - leading local and foreign companies l l Focused on long term financing of debt and equity, but also funding working capital, trade and purchase of industrial equipment Total cumulative amount invested in Ukraine to date is over EUR 7 billion - funding almost 290 projects

EBRD Annual Business Volume - Ukraine Net ABV

EBRD Current Portfolio in Ukraine – Allocation by Sector (30 September 2011) Total Portfolio Euro 4, 3 billion Equity Funds Agribusiness Manufacturing and Services Municipal Infrastructure Natural Resources Power and Energy Financial Institutions Property and Tourism Telecommunications Transport

Working With The EBRD

Benefits of working with the EBRD l Preferred Creditor Status – granted by the Go. U in the Agreement Establishing the EBRD is key. Because of this: – Many companies consider that the EBRD provides a level of protection against unfair treatment and corrupt practices. – Co-lending banks (especially B Lenders) like to partner with the EBRD for the same reason – and as such involving the EBRD can act as a catalyst to attracting other banks. l The Bank has been active and represented in the Region for almost 20 years: – Extensive knowledge of local economy, business environment and practices – Close working relationships with government

Benefits of working with the EBRD l l l EBRD is willing to share the political risks Financial flexibility (wide range of products tailored to fit client needs). The Bank is increasingly unique as an institution willing to lend long-term. The Bank is willing to take equity stakes in clients – both true equity and portage equity. Typically the Bank takes a seat on the Advisory Board and can provide significant local knowledge and support. Technical assistance is available – particularly for projects including components of energy efficiency.

EBRD Financing Features - Debt l l l Amount - typically over € 10 million - typically limited to 35% of the total project cost of a project; Currency – typically USD and or Euros (we currently have no capacity to lend in local currency); Structure – we can consider investments as Senior, Subordinated / Mezzanine, - Long-term, and short term Working Capital Finance. We can work alongside domestic and international banks ; Term / Maturity – typically up to 5 -8 years for Long-Term Senior Debt to companies – potentially longer for projects; Margins – dependent upon the risk profile. Note, that the EBRD can provide debt with a significantly longer term than is typically available to private companies from local banks.

EBRD financing features - Equity l l l As an equity investor the EBRD can provide new equity as a minority shareholder - typically, when we invest equity, our share is between 25% and 35%. Through the Supervisory Board, EBRD will participate in increasing shareholders’ value. We look to sell our shares (typically after 5 to 7 years) either together with the controlling shareholders to a new reputable owner, or under a put option back to the controlling shareholders.

How to Approach the EBRD l l l There is no specific template Each financing will require thought and a tailored information package The following provides and outline of what we would normally expect to be provided with:

EBRD Expectations / Requirements 1) Transparency – a clear willingness and intent to provide accurate and honest information 2) The transaction needs to be “bankable” a) Economic – i. e. projected cash flow is robust, justifiable and sufficient to repay debt – speculation is an equity risk; b) Management has the necessary experience, a reputable track record and can evidence a willingness to embrace good business practices; c) Ability to provide an information package containing sufficient information for the Bank to make a preliminary assessment 3) IFRS accounting – annual accounts need to be audited in accordance with IFRS.

Information Package / Business Plan Basic Description of Company / Project - History / activity of the Company - Relevant management experience - Description of the operation – and proposed use of funds - Major suppliers / buyers - Exports / imports Summary of Assets - What assets does the Company own? - What is their realistic value? - Where are they located? - Are they pledged to banks? Clear Ownership Structure - Clear description of all ultimate shareholders noting any political connections. - Organization chart showing all companies in the group + jurisdictions of incorporation Summary Financial Projections - Summary financial projections for the life of the debt - A clear summary of the key assumptions - An overview of existing bank debt – by bank including terms / amortization structure / security

EBRD Project Approval Procedure: • EBRD receives initial information (Info. Package / Business Plan) and considers project – Concept Review (approx. 1 -2 months) • Following Concept Approval – a Mandate Letter is signed which outlines the project plan, development expenses and responsibilities. • Due diligence and Project preparation – conclusion of a Term Sheet. • Final Review by Credit Committee (approx. 3 -6 months from Concept Review) • EBRD Board Approval of Directors (approx 1 month) • Signing – at which point documentation becomes legally binding Total project preparation time: approx. 6 -9 months (depending on project status and the Company’s preparedness)

Ukraine – Looking to the Future

Comparisons Ukraine Russia Turkey Romania Population 46 m 140 m 73 m 22 m GDP (US$) 132 bn 1, 479 bn 737 bn 162 bn GDP per cap. (US$) 2, 911 10, 438 10, 127 7, 542 Debt (US$) 142 bn 489 bn 290 bn 120 bn Foreign reserves (US$) 33 bn 479 bn 81 bn 46 bn WB ease of doing business ranking 152 111 71 72

Prospects for the Years Ahead – Current Situation The Current Situation • Endemic corruption • Increasingly aggressive Tax dept. • Corrupt Customs Dept • Corporate raider activity • No clear Go. U direction / strategy • Risk of UAH devaluation • Increasing cost of UAH debt • No LTD maturities available – forcing companies to finance ST • Inefficient legal system • Decline in WB Ease of Doing Business Rating (152/183) External Influences • Financial crisis in Europe • Euro banks focused on problems at home • Lack of funds for FDI – investors are very particular Prospects for the Future? ? • Difficult to be positive…. • No long-term funding available in UAH • Very little investment appetite from Euro banks • EBRD / IFC are the only real LTD providers • Very little real FDI / investment appetite • Many companies will defer capex plans until some degree of stability returns

Short-term challenge in Ukraine: avoiding a new crisis Macroeconomic risk: medium to high: l High levels of external private sector debt (foreign currency denominated and much of it short-term); l Pegged exchange rate; l Large fiscal rollover requirements; l Poorly capitalized and highly dollarised financial system; l Loss-making energy sector. l NBU / Government needs to urgently address the lack of liquidity in local currency – and facilitate longer term funding lines.

Ukraine: longer-term challenges Key priority: To improve the institutional and business environment / reduce corruption and attract investment. Other challenges: l Diversifying export base; l Reforming Nafto. Gaz; l Reducing dollarisation and pursuing independent monetary policy; l Increasing productivity in agriculture – food security l Improve legal system

What Can We Expect To See l 2012 is likely to be a very difficult year for Ukrainian companies. l The Only industry which is likely to remain strong is Agribusiness. l GDP growth is likely to fall (to below 4%) - due to weaker exports l Consumer spending is likely to remain curtailed. l l Devaluation concerns may be addressed in the short run (if the government can conclude a gas deal with Russia). IMF deal now seems unlikely. UAH 10 to the $? ? . . . the potential still exists! Exports have become less competitive (as most neighboring countries have already devalued against the US$) and will take time to recover. Demand from overseas will be severely impacted by the effects of the broader recession Violation of key democratic principles and ongoing political pressure on the opposition will leave the door to the EU closed.

The EBRD l l The EBRD will remain committed to support commercially viable local and international companies that embrace transparency and good business practices. Our Ukraine Strategy Paper is available on our web site: http: //www. ebrd. com/pages/country/ukraine/strategy. shtml We expect to see an increasing appetite for the EBRD - both as a lender and as equity (often to provide some level of protection) We are concerned that some companies will take short term debt to fund long-term assets.

How to contact us Tel: +380 44 277 1100 Fax: +380 44 277 1160 Email: kiev@kev. ebrd. com www. ebrd. com/ukraine Kiev Resident Office 16 Nemyrovycha-Danchenka st. Kiev 01133, Ukraine