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Ukraine Attracting foreign investments in the

corporate bond sector Practical aspects

Vadym MinchenkoHead of Fixed Income Department

Alfa-Bank Ukraine

Presentation for the conference on «Ukrainian capital markets»10-11 March, 2004

London, UK

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TABLE OF CONTENT

1. Major parameters of Ukrainian corporate bond market

2. Ukraine’s macroeconomic performance

3. Specific features of the corporate bond market regulation

4. Performance of the corporate bond market in 2003

5. Typical structures of bonds

6. Risks

7. Attractiveness of bonds’ issues

8. Influences on costs of operations

9. Opportunities to do business on the market

10. Conclusions

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UKRAINIAN CORPORATE BOND MARKET

The market inception since 1996

Impetuous growth of the market in 2001

Major categories of bond issuers are represented by industrial and banking sectors

Issuers include both state and privately owned enterprises

Liquidity is conditioned by the secondary market, and supported by the issue underwriter

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UKRAINE’S MACROECONOMIC PROSPECTS

Further enhancement of the country rating

Rapid economic growth

Withdrawal from the FATF list of non-cooperative countries

Expansion of the economy credit capacity

Qualitative change of issuers accompanied by increasing transparency and openness to the public

Growth of capital requirements on the part of domestic enterprises

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SPECIFIC FEATURES OF THE CORPORATE BOND MARKET REGULATION

Ukrainian legislation restricts for joint-stock companies the volume of bond issues by 25% of their statutory fund (irrespective of guarantees)

Allowance of public offering (which comprises an offer to conclude a bond purchase contract to indefinite circle of persons)

Relatively tough requirements on information disclosure (about an issuer and issue details)

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PERFORMANCE OF THE CORPORATE BOND MARKET IN 2003

The number of investment attractive issues reached 159 for a total of UAH 1.4 bln

Growth rate. The volume of bonds’ issues was five times as much as that in 2002

Preferences of the market players. Low sensibility to risks, higher yields, short investment period (6-12 months)

Major participants of the market. Commercial banks or their affiliated structures (over 90%)

Issuers. Primarily leading domestic companies

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PERFORMANCE OF THE CORPORATE BOND MARKET IN 2003

Once having enjoyed the low cost borrowing through the issue of corporate bonds, growing number of companies reiterate their bond issues

SVP-structure tends to be increasingly used for bond issues

More and more bond issues are guaranteed by third entities

The market infrastructure: the overwhelming majority of OTC operations are held on PFTS trading system (the First Stock Trading System)

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TYPICAL STRUCTURES OF BONDS

Volume:UAH 10-50 mln ($2-10 mln)

Term to maturity:1.5-3 years. However, all bonds whose maturity exceeds 12 months are complemented with 6- to 12-month put options

Coupon rate:usually fixed, sometimes tied to the UAH/USD exchange rate (16-18% p.a. in UAH, 10-12% p.a. in USD)

Liquidity:generally low, although the liquidity of some issues is higher thanks to efforts of the issue underwriters and the market general upsurge. The institute of market-makers is being formed

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RISKS

Currency risks (exchange rate fluctuations)

Political risks

Administrative risks

Legislative risks (possible change in Ukrainian legislation)

Market risks (related to the market transparency and changes in its infrastructure)

Credit risks

Operational risks

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ATTRACTIVENESS OF BONDS’ ISSUES

The attractiveness of issues enhance:

Currency hedge options Yield is tied to UAH/USD or UAH/EUR exchange rate

Nominal value is tied to UAH/USD or UAH/EUR exchange rate

Floating coupon rate which allow issuers to bring yields into accord with current changes in macroeconomic situation

Put option

Third party guarantee

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INFLUENCES ON COSTS OF OPERATIONS

Opening of account of investor-nonresident

Opening of securities account with custodian

Sale of currency at the interbank exchange rate

Deduction of taxes (to 15% of return)

On investment repatriation and purchase of currency – compulsory payment of 1.5% from the amount of purchased currency to the Pension Fund. The currency is purchased at the interbank exchange rate

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OPPORTUNITIES TO DO BUSINESS ON THE MARKET

Investment purpose – investments

Real yields of annual investment 13-15% p.a. in currency equivalent

Availability of reinvestment

Availability of investment diversification

Divestment period 3-5 days

Exit from the market 7-10 days

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OPPORTUNITIES TO DO BUSINESS ON THE MARKET

Investment purpose – speculations

Availability of investment diversification

The market liquidity depends on credit quality of an issuer, experience of its underwriter, activity of the market participants

Divestment period 1-3 days

Exit from the market 7-10 days

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Favorable macroeconomic situation stimulates businesses to issue corporate bonds

Stable exchange rate of the national currency and high liquidity in the banking sector fuel interest of potential investors to the

‘market’ issues denominated in UAH

CONCLUSIONSThe market of corporate bonds is well-established in

Ukraine

The number of issuers of high credit quality is increasingly growing

The market infrastructure is gradually adapted to servicing transactions with notes

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CONCLUSIONS

The work to be done:

to obtain the country investment rating

to draw more players to the market, including both issuers and investors (short- and long-term)

to enhance credit quality of bond issuers

to cancel a part of artificial restrictions with respect to the volume of issues, coupon-setting mechanism etc.

to set standards of more complete disclosure of information on bond issuer

to abolish some compulsory payments

The pension reform (upon condition of active involvement of private pension funds) along with the pending upgrowth of investment funds are expected to give a new impulse to the development of corporate bond market in Ukraine

The market of corporate bonds is well-established in Ukraine

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ALFA-BANK PROJECTS: BONDS IN UAH

Metalen

THE FIRST BONDS’ ISSUE

UAH 50,000,000TERM 1,5 YEARS

2002

MANAGER, UNDERWRITER

AVK

THE FIRST BONDS’ ISSUE

UAH 9,000,000TERM 1,5 YEARS

2002

MANAGER, UNDERWRITER

Kovcheg

THE FIRST BONDS’ ISSUE

UAH 40,000,000TERM 10 YEARS

2001

MANAGER, UNDERWRITER

HalychpharmTHE FIRST BONDS’ ISSUE

UAH 1,200,000TERM 1 YEAR

2001

THE SECOND BONDS’ ISSUEUAH 3,190,000

TERM 1,5 YEARS

2002

MANAGER, UNDERWRITER

Agroproducton the security of Agroexport

THE FIRST BONDS’ ISSUE

UAH 15,000,000TERM 3 YEARS

2002

MANAGER, UNDERWRITER

Kyivstar GSM

THE SECOND BONDS’ ISSUE

UAH 59,000,000TERM 1,5-2 YEARS

2002

MANAGER, UNDERWRITER

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ALFA-BANK PROJECTS: BONDS IN UAH

Mandarin Plaza

THE FIRST BONDS’ ISSUE

UAH 5,425,000TERM 7,5 YEARS

2003

MANAGER, UNDERWRITER

Regional Drugstore Holding Company

THE FIRST BONDS’ ISSUE

UAH 6,000,000TERM 1,5 YEARS

2003

MANAGER, UNDERWRITER

Agrospezresursyon the security of Molochnik

THE FIRST BONDS’ ISSUE

UAH 10,000,000TERM 3 YEARS

2003

MANAGER, UNDERWRITER