Lviv firm developing bond market for medium-sized firms

By Alla Vetrovcova / May 06, 2005 12:01 AM

A Lviv financial firm is developing a niche market by providing support to medium-sized firms that want to raise money through the bond market.

LVIV, May 5 – Optima Financial Group, a Lviv-based firm, has developed a niche market that is finding ready acceptance by Western Ukrainian businesses that want and need to raise money but are skittish about the potential loss of control that comes with public stock offering. Optima leadership says that it has met expectations as lead managers of bonds issues and are optimistic for the future as growing businesses promise to enlarge their bond offerings in the near future.

Now the main task for Optima Group is to further develop its niche by persuading companies that they can raise profits by issuing bonds.

Optima Group, which secured its license only in March 2004, has during the last six months managed bond issues for Shkolyaryk, a publishing house;  Intermarket, a retailer chain; Ukrtekhnofos, a chemical fertilizers producer; and most recently for First Private Brewery, all Lviv-based companies. The issues were UAH 5 million to UAH 10 million.

“We work with small capital because our issuers are mid-sized enterprises. However, we think that we have our own niche in the market confirming that we are experts in our business,” said Oleh Medvedev, executive officer of Optima Group.

There is still a lot of work to do as both local businessmen and investors do not yet trust the underdeveloped bond market. However, now is a good time to establish a niche in the market.

“Non-residents are much more advanced. They know the worth of investing in bonds and they have already estimated bonds as really profitable instruments abroad,” he added.
 
According to Medvedev, bonds as financial instruments are much more suitable to enterprise owners. Issues allow them to parlay the cash into profits without being influenced or losing control.

“Bonds are a much more effective instrument than stock shares. Bonds are in demand, whereas shares are still risky in the underdeveloped market,” Medvedev said.

When Intermarket issued bonds worth UAH 10 million in 2004, Optima Group was the lead manager and Ukreksim Bank was the underwriter; the bond issue sold out in two weeks.

According to Ihor Kondrat, comptroller for Intermarket, the company decided on the bond issue as an opportunity for further development.

“We’ve had two goals regarding the bonds: first, to attract finances and secondly, to become open to financial circles,” Kondrat said.

Intermarket opened its first store in 1998. Now it owns two supermarket chains, the Arsen and Barvinok discount shops. Intermarket is preparing for a second issue worth UAH 50 million. 

A few days ago, Ukrtekhnofos, a chemical fertilizers producer, a second agreement with Optima for a deal valued at UAH 5 million. It is already registered by the State Security Market and Stock Commission.

According to Mykola Adamovych, vice-director of finance at Ukrtekhnofos, it is better to start operating with small issues. Ukrtekhnofos was registered in 2000, and as a young enterprise, needed additional capital without attracting large investment, Adamovych explained. The first bond issue was successful, he said.

Local bond market experts, though, are not quite as enthusiastic as Optima Group. Vyacheslav Kharchenko, general director of C-Bonds Ukraine, said that until 2005 it was not profitable to provide such a service for mid-size companies who wanted small bond issues.

“Issuers can take loans at a high interest rate, such as 18 percent to 20 percent at banks. But the profit is really small, because there are also expenses for commission, services of an underwriter, and there is also a fee for a national rating, which is obligatory for each issuer. But, there is, of course, an advantage for issuers in that there is no need to provide a deposit when taking the loan.”

The annual interest rate for bond holders in Ukraine is about 17 percent.

The future for the bond market of this type depends a lot on changes in the banking sector. If the hryvna interest rates at Ukrainian banks become lower for loans, dropping from 17 percent to 10-12 percent that will have a positive impact on the bond market, according to Kharchenko. Then banks could underwrite loans at lower interest rates. Already, there are indications that some banks will decrease the interest rates for loans, he said. 

Optima Group is so far the only investment group that works with such small bond issues. Alfa Bank Ukraine also serviced mid-size companies, but for issues that were a minimum of UAH 10 million.

“However, last year showed that it is not worthwhile for Alfa bank [to underwrite bond issues] any more, probably because it’s not so profitable for the bank,” Kharchenko added. “The underwriter’s profit is really small when issues are small,” he added.

However, Adamovych pointed out that Ukrtekhnofos production capacity doesn’t permit rapidly increasing the bond issue from UAH 10 million to UAH 50 million. They could not qualify to float these volumes.

“But I think that in the near future we can expand the issue, and now we’ve already had experience with small volumes,” he said.

That allows a mid-size enterprise like Ukrtekhnofos to test the domestic market demand.

“We will know how to operate with bigger issues,” Adamovych said.

He sees the current situation with the bond market as promising. There is no deposit, he said, and that’s advantageous. The only disadvantage is the bureaucracy involved in registering documents for issuers, he added.

The positives outweigh the negatives according to Adamovych, “…otherwise we would not be involved in bond issues.”