Ukraine takes cautious steps down IPO road

Problems and prospects for privatization

THIS YEAR A number of Ukrainian companies are expected to undertake IPOs in the local and international equity markets. "Two years ago, if you had asked a Ukrainian company if they were going to do an IPO they would have asked ‘Why, what’s the point?’ but now companies are finally realizing the necessity, and the potential gains, of the capital markets," says Andrei Bogdanov, head of Ukraine research at Troika Dialog, an independent Russian investment bank that opened an office in Kiev last year.

Up to now, Ukrainian companies have largely relied on the bank market to fund their expansion but as they become more and more leveraged, IPOs increasingly make sense. "The pre-IPO market is very strong in Ukraine and an IPO boom is going to happen. This year we will see a lot of companies get ready for fully fledged IPOs," says Lucas Romriell, equity sales associate of Concorde Capital, the second-biggest investment bank in Kiev.

At least eight Ukrainian companies have announced their intention of selling their shares on public markets over the next 18 months (see table). These include Finance and Credit, the country’s 10th-biggest bank, which plans to offer 25% of its equity. Milkiland, a dairy products manufacturer, is poised to offer 20% of its shares on the Frankfurt stock exchange in the second quarter of this year. Galnaftogaz, the country’s biggest independent operator of petrol stations, is also rumoured to be about to announce IPO intentions.

There are, however, challenges facing any prospective equity issuer. Although the main local stock exchange, the PFTS, is the world’s best performer this year, with 62% growth, it only trades privately placed shares and has never listed a public IPO. At the same time, the international markets pose a huge accounting and corporate governance test for Ukrainian companies.

Changing mentality

So far, Ukrainian companies have followed a standard pattern in their funding strategies. Initially, excess profits fuelled their growth but as companies expanded, so their financing needs increased. Businesses such as Milkiland and XXI Century Investments, a property company that is one of a handful of Ukrainian firms to have undertaken an IPO, often turned to the local banks for dollar-denominated loans.

But as corporate leverage levels have grown dramatically, in some instances above five times, banks have become less compliant. "Some companies that have announced IPO plans are [highly] leveraged and need to balance their capital structure. The release of new equity by such companies should expand their capacity for new borrowings and facilitate their further growth," says Valeria Gontareva, deputy chair of the board and head of financial markets, ING Bank Ukraine.

"Even when pension funds come in Ukraine, they will be extremely risk averse, and therefore will be bond investors at first" David Lucterhand, USAID Access to Credit initiative

Some bankers, however, caution that although more Ukrainian IPOs will be evident over the next few months, no one should get too carried away. "I think it is premature to say that this is an IPO boom," says Gregory Gurtovoy, chief executive officer of the Ukraine office at Russian investment bank Renaissance Capital. "More IPOs are clearly necessary and likely to happen soon but it is a process, not an event. It is a process where the issuer has to be ready and understand the associated advantages and disadvantages of the capital markets."

So far, four Ukrainian companies have undertaken IPOs – all on international exchanges. These include XXI Century Investments, which raised $137 million in December 2005, and Ukrproduct Group, which raised $11 million in February 2005. Both were listed on the UK’s Alternative Investment Market (AIM). These first IPOs offer valuable lessons about the time and expense necessary for international listings but they also illustrate the huge differences between companies that have listed on international exchanges and those Ukrainian companies that have announced plans to go to the local markets.

"This is the first generation of capitalists and so they are not necessarily the best clients to do an IPO. Many business owners are still afraid to lose control over their businesses or disclose the amount of information international listings require," says Borys Tymonkin, chairman of the board of Ukrsotsbank, the sixth-largest bank in Ukraine by assets.

"Paradoxically, in Ukraine it seems that the economy does better when politics are in a mess" Andrei Bogdanov, Troika Dialog