Ukraine is undergoing a period of structural reform throughout its financial and banking sectors that is unprecedented in its scale and complexity. The reform of the currency control regime culminated in the full cancellation of a 26-year old system and the introduction of a legislative road map for the gradual implementation of the free movement of capital. The reform gave a critical impetus to the development of the securities market and foreign investments, with Clearstream opening a direct securities account at the National Bank of Ukraine (the NBU) to provide easier access to hryvnia-denominated sovereign bonds. Ukrainian banks were authorized to grant short-term loans in local currency to foreign investors so they could invest in the bonds and hedge the FX risks of such transactions. The introduction of the IBAN standard is another example of the ongoing process of harmonizing the Ukrainian payment landscape.
One of the most notable tendencies on the lending market in Ukraine is the increased interest in project financing for renewable energy and infrastructure projects. The newly implemented electricity market reform is incentivizing renewable energy producers with an attractive feed-in tariff coupled with state guarantees of full and timely payments and the positive track record of the state off-taker, resulting in a huge appetite for extending debt and equity financing. In broad terms, the project financing deals on the Ukrainian market can be categorized as classic project financing, restructuring, or quasi-project financing.
Under “classic” project financing, long-term secured loans and sponsor equity funding are provided to Ukrainian SPVs for the construction of power plants. Typically, multilateral financial institutions (IFIs) such as OPIC, EBRD, IFC, BSTDB, NEFCO, and international development institutions (DFIs) such as Finnfund, Green for Growth, IFU, Proparco, DEG, and FMO, extend long-term financing, with international developers providing sponsor equity financing on a non-recourse basis. One of Redcliffe Partners’ most significant project financing breakthroughs is advising EBRD, NEFCO, BSTDB, Finnfund, IFU, Proparco, and J. P. Morgan Securities plc on EUR 262.6 million financing to SyvashEnergoProm, with NBT and Total Eren providing sponsor support for the construction of a 250MW wind power plant with an overall cost of EUR 380 million, making the project the largest investment ever in the renewables energy sector in Ukraine. The transaction was innovative primarily because it was the first ever implementation of a full-scale onshore and offshore project accounts structure, which became possible after the recent reform and with the NBU’s support. A similar large-scale project, EuroCape, with the first phase financed by OPIC, is ongoing.
Redcliffe Partners has also recently acted as Ukrainian legal counsel to FMO, the Green for Growth Fund, and GIEK with respect to EUR 37.8 million financing to a 54MWp solar PV plant. The participation of the export credit agency in the project financing was particularly interesting and innovative for the Ukrainian market.
Under the refinancing model, the financing is provided to refinance development costs incurred by sponsors at the construction stage for commissioned and ready-for-operation projects.
The participation of foreign commercial banks in project financing remains limited, however, due to the lack of consideration of country risk in long-term financing, certain bankability issues with power purchase agreements, and negative feed-in tariff experience in other jurisdictions. In this respect, unlocking a political risk insurance for Ukraine from such providers as OPIC, MIGA, and EXIMBANK could open the gate to the active participation of foreign commercial banks in project financing.
Among recent “quasi” project financing transactions – basically a working capital term secured loan for the construction of the renewable energy facilities – are a EUR 25 million loan to MHP for financing a 10MW biogas plant and a USD 56 million loan to Kernel for financing four biomass plants with an aggregate capacity of 47MW.
Infrastructure project financing is not as active as expected, although sometimes provided by IFIs. Among recent infrastructure deals are the USD 74 million financing by the EBRD and IFC to MV Cargo in connection with a new private grain terminal in the Port of Yuzhnyi and the USD 50 million financing by EBRD to Nibulon for the expansion and modernization of the grain logistics river infrastructure.
Another interesting potential opportunity is financing through the PPP model. The EBRD and IFC have been assisting the Ukrainian government to implement, as pilot projects, financings of Ukraine’s Olvia and Kherson ports using this structure.
In addition to project financing, both syndicated pre-export finance facilities and bilateral loans to large Ukrainian agricultural producers and exporters are still quite active, with IFIs, DFIs, and commercial banks all extending short- to mid-term financing.
Olexiy Soshenko, Managing Partner, Olena Polyakova, Counsel, and Evgeniy Vazhynskiy, Senior Associate, Redcliffe Partners