1. 1 Ukraine Attracting foreign investments in the corporate bond sector Practical aspects Vadym Minchenko Head of Fixed Income Department Alfa-Bank Ukraine Presentation for the conference on «Ukrainian capital markets» 10-11 March, 2004 London, UK

2. 2 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

3. 3 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

4. 4 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

5. 5 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)

6. 6 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

7. 7 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)

8. 8 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

9. 9 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

10. 10 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

11. 11 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

12. 12 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

13. 13 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

14. 14 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 CONCLUSIONS The 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

15. 15 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

16. 16 ALFA-BANK PROJECTS: BONDS IN UAH Metalen THE FIRST BONDS’ ISSUE UAH 50,000,000 TERM 1,5 YEARS 2002 MANAGER, UNDERWRITER AVK THE FIRST BONDS’ ISSUE UAH 9,000,000 TERM 1,5 YEARS 2002 MANAGER, UNDERWRITER Kovcheg THE FIRST BONDS’ ISSUE UAH 40,000,000 TERM 10 YEARS 2001 MANAGER, UNDERWRITER Halychpharm THE FIRST BONDS’ ISSUE UAH 1,200,000 TERM 1 YEAR 2001 THE SECOND BONDS’ ISSUE UAH 3,190,000 TERM 1,5 YEARS 2002 MANAGER, UNDERWRITER Agroproduct on the security of Agroexport THE FIRST BONDS’ ISSUE UAH 15,000,000 TERM 3 YEARS 2002 MANAGER, UNDERWRITER Kyivstar GSM THE SECOND BONDS’ ISSUE UAH 59,000,000 TERM 1,5-2 YEARS 2002 MANAGER, UNDERWRITER

17. 17 ALFA-BANK PROJECTS: BONDS IN UAH Mandarin Plaza THE FIRST BONDS’ ISSUE UAH 5,425,000 TERM 7,5 YEARS 2003 MANAGER, UNDERWRITER Regional Drugstore Holding Company THE FIRST BONDS’ ISSUE UAH 6,000,000 TERM 1,5 YEARS 2003 MANAGER, UNDERWRITER Agrospezresursy on the security of Molochnik THE FIRST BONDS’ ISSUE UAH 10,000,000 TERM 3 YEARS 2003 MANAGER, UNDERWRITER