Financial Business Breakfast with EBRD, MHP, TAS AGRO, AgroVista and Oschadbank
Konstantin Tkachenko, 27.05.2019
May you live in interesting times, a Chinese curse says. In Ukrainian realities, "interesting times" is usually associated with elections and political instability. The year 2019 in this sense is twice as tense due to the presidential and parliamentary campaigns.

In the periods like this one, the business life of many market participants freezes in anticipation of how the new person in charge will take control over the situation? Although Ukrainian agrarians hardened by crises cannot be called alarmists. After all, in addition to the elections, they have to deal with many problems every day. And one of the main ones is an severe shortage of finances. brought together major international investors, Ukrainian bankers and key market players to discuss the burning questions of financing the agro-industrial complex. We spoke of the sources of credit, the reputation of the market in the light of high-profile defaults, expectations from the upcoming launch of the land market and much more with Agribusiness projects Senior Banker at EBRD Anna Lebedynets, the Deputy Director of the micro, Deputy Director of MSME Department at Oschadbank (State Saving Bank of Ukraine) Yuliya Zhulanova, and Chief Financial Officers of MHPViktoria Kapelyushnaya, TAS AgroIrina Amelina, and AgroVistaVladyslav Vyniarsky.

What finances be like 2019 is the year of presidential and parliamentary elections. Therefore, many businesses and international organizations are more cautious about investing in Ukraine. Anna, what is the EBRD policy in this regard?
Anna Lebedynets: We remain one of the leading investors in Ukraine, we provide financing to our clients. Moreover, we expect more investments in 2019 than in the past year. Therefore, if some other banks or investors are wary of an evolving political situation, the EBRD continues to work as part of its strategy. We can invest in the country about EUR 1 billion annually. About 20 per cent of this amount may be allocated for projects in the agricultural sector.
"We can invest in the country about EUR 1 billion annually," Anna Lebedynets.
We can invest in the country about EUR 1 billion annually,
— Anna Lebedynets Do I get it right that in terms of financing the EBRD is focused more on small and medium agribusiness in recent years?
Anna Lebedynets: I cannot say there is some kind of a focus shift. A few years ago, with the support of the EU under the EU4Business program, we created a special department consulting and lending to small and medium-sized businesses. Let's say that our team and resource base has increased to work with smaller companies since we financed larger companies more often. But this does not mean that we have shifted the focus — we have just expanded it. Irina, does TAS Agro consider attracting international credits?
Irina Amelina: We see perspectives for the implementation of long-term projects. Now the holding has mainly short-term financing and it is sufficient for current needs. But we have rather ambitious plans. The first and main task is to expand the land bank. Now we have 80 thousand hectares. But we are planning this year to expand it to more than 100 thousand hectares. In this case, we will probably need additional funding. After all, the increased land bank will require a stronger infrastructure including new grain elevators together with the existing ones being upgraded and the machinery fleet being updated.
"The first and main task is to expand the land bank. Now we have 80 thousand hectares. But we are planning this year to expand it to more than 100 thousand hectares," Irina Amelina.
The first and main task is to expand the land bank. Now we have 80 thousand hectares. But we are planning this year to expand it to more than 100 thousand hectares.,
— Irina Amelina Viktoria, what are your expectations from the political year 2019?
Viktoria Kapelyushnaya: 2019 is another year in the company's development, we do not see how this year is special. And in general, we set plans for at least the next 5 years. At the same time, we clearly understand that the planning horizon should be 10 years. This year is fairly politically coloured for Ukraine, but we all have experienced it many times already.

As for MHP's development, everything is going according to plan, we continue stable organic growth in our production indicators. We finish the construction of 3rd-4th phases at the Vinnytsya Poultry Farm. Besides one of the recent big news is the completion of the transaction for the purchase of the Slovenian company Perutnina Ptuj.

We considered many different enterprises, there were plenty of rumours, pitfalls, still, we successfully closed this transaction. I am sure that this is only the first step towards our development in Europe, where MHP is already the 3rd largest producer of chicken. We see great prospects in this market. If your production is in the EU, the whole of Europe is open to you. Acquiring this asset, was there much pressure from European protectionists?
Viktoria Kapelyushnaya: Yes, and you must have seen the pressure that the French company LDC put on us using bad P.R. Nevertheless, we work in a market economy, and the market refereed everything. In this sense, there is a good example in world history. When the first cars became popular, a decree was passed in London limiting their speed to no faster than that of carriages. As you know, this did not last long. This reminds our case. If you have the right business model, no challenge is a threat. It may temporarily affect your financial results, but globally you are stable and competitive. Yuliya, recently in an interview with your colleagues, I was told that Oschadbank no longer intended to work with big agribusiness, but instead turned its attention to farmers and even to single tax payers. Why is that?
Yuliya Zhulanova: Indeed, since 2017, Oschadbank has strengthened the promotion of lending in the small and medium business segment, including private entrepreneurs, to help them develop their business. According to our new strategy, the share of the loan portfolio of MSME in the total portfolio of the bank should grow to 30 pct.

If we talk about the current loan portfolio of MSME in Oschadbank, it is 45 pct represented by agricultural sector loans, despite the fact that the average share of SME agro loans from banks is close to 30 pct. Our bank is universal in its approach to financing agro clients from different business segments. We provide funding to clients with a land bank of 50 hectares.

We are interested in all clients since the formation of a loan portfolio with different amounts and a large number of borrowers reduces portfolio risks. The bank had experience in lending exclusively to large companies and today we understand that dependence on one borrower may serve us a dirty trick.

As for small enterprises, during the period of crises, they learned to make good use of their money. SME clients have a stable business that allows them to service their loans. When analyzing them, we see, I would say, smart finances. We understand that a company may not show all revenues, but they are enough to fulfil their obligations in a timely manner.
"SME clients have a stable business that allows them to service their loans. When analyzing them, we see, I would say, smart finances," Yuliya Zhulanova.
SME clients have a stable business that allows them to service their loans. When analyzing them, we see, I would say, smart finances,
— Yuliya Zhulanova.
Today, cooperation with the EBRD and other international organizations helps us with reinforcing the presence of Oschadbank in the medium business segment. This is the next step after the bank has implemented a microcredit program with a credit facility of up to UAH 5 million. I am confident we have the needed expertise to analyze small farmers and due to the largest network of offices opened in all localities, we will be a driver for lending to farmers. The bank will be the driver of agro-SME development across the country including the active promotion of government programs to reimburse part of the cost of purchased machinery and interest on loans. Oschadbank becomes a so to speak counselor of small agricultural producers in cooperation with the largest suppliers of high-quality equipment, offering the best price in the framework of affiliate programs. Bankers often justify refuse to provide a loan by the fact that small and medium-sized enterprises have no collateral. What is Oschadbank's practice?
Yuliya Zhulanova: As I have said, a micro-crediting program is available in our bank, one of the conditions of which is the possibility of granting small loans without a pledge or with one that other banks do not accept. This approach became possible due to agrarians' good credit reputation.

Oschadbank also offers financing under the program with the European Investment Fund and the European Investment Bank. This program provides for a loan with collateral the cost of which is 30 pct of the loan, and the remaining 70 pct is provided by the partner's guarantee. Thus, for getting a bank loan, the financial condition of the borrower is more important than the collateral. How high is the percentage of defaults on loans among agriproducers?
Yuliya Zhulanova: Banks are not very willing to reveal this information. However, behind the scenes, the SME market operators note the good quality of the Agro loan portfolio in this segment. I can confirm that the portfolio of Oschadbank in the MSME segment is qualitative, the percentage of bad loans is less than 1 pct. The main causes of bad loans are either fraud (which is possible in any segment and business), or raiders attack.
Vladyslav Vyniarsky: Yuliya, I have never heard the bank having no worries about the absence of collateral.
Yuliya Zhulanova: Under any circumstances, a lender is interested in a high-class pledge. But, thanks to the mentioned program, we have a tool to expand access to financing for borrowers of different categories.

We work in the open market. Oschadbank here is not one and only in some segments state bank, but a competitor on market conditions in terms of speed, conditions, service. Cooperation with the EIB is our advantage, but far from the only one.

Financial policies Vladyslav, AgroVista underwent a complex reorganization process last year. Have you been prompted to do so including the need to be understandable for lenders? And, by the way, are you still often confused with UkrAgroCom and Hermes-Trading?
Vladyslav Vyniarsky: AgroVista is an already recognizable brand. Indeed, in 2016 we initiated the reorganization of the Group, as a result of which we transferred all the companies completely under a single parent structure. Last year, KPMG conducted an audit of all assets of the company, and now we are establishing corporate governance processes.

The Group has gone through a great innovative development. As a result, we are now signing an agreement with the export agency Euler Hermes. We are proud that we, in fact, returned this agency to Ukraine.

However, there are two important points to be kept in mind. We received a guarantee from Euler Hermes, but the agency does not provide funds, they say: "Guys, here's Landesbanken for you, go negotiate." Each German bank which we contacted pointed at odious cases of Mriya and Creative Group, although so much time has passed. In this sense, it is extremely difficult to prove to investors and bankers that we are different. It took us some time. But thanks to the reorganization and audit, we did manage to do it. As for the cooperation with Landesbanken, this is a seven-year line with rates much lower than those in Ukraine. How much is it about? And what is the funding for?
Vladyslav Vyniarsky: We will invest EUR 7.2 million in the purchase of German equipment, the reconstruction of the sugar factory, agricultural equipment and energy efficiency. Do you believe in the future of sugar?
Vladyslav Vyniarsky: You know, this question reminded me of my banking times. In the early 2000s, when Kernel was building oil-crushing plants, it was often said: "What are you doing this for? There is a shortage of seeds in the country." In 2001, about 3 million tons of sunflower seeds were produced in Ukraine, and these days it is already 13-14 million tons. Sunflower seeds production is increasing steadily.

The same is about sugar. Today people say: if you grow sugar beet, it means that you have everything wrong. When sugar was at USD 500 per ton, everyone said: "Wow, it's great you're doing this." I agree with Viktoria when she says that everything depends on management. There are hedging instruments, forwards, etc. In addition, the sugar market is very cyclical. Viktoria, will you tell about the sources of funding for MHP.
Viktoria Kapelyushnaya: Eurobonds are the main source. They account for 85 pct of our financing portfolio. Due to their longtermness (8 years), it is one of the most convenient financial instruments. It is also important to enter the market in due time. The quality of the company, of course, matters as our rating is higher than that of the country. This would seem incomprehensible, if not for our case. In the difficult 2015, not a single company or even a country, except for us, made Eurobonds payments. The market remembers everything.
"Eurobonds are the main source. They account for 85 pct of our financing portfolio. It is also important to enter the market in due time,"
Viktoria Kapelyushnaya
Eurobonds are the main source. They account for 85 pct of our financing portfolio. It is also important to enter the market in due time
— Viktoria Kapelyushnaya.
The complexity of work lies in short-term loans unprofitability if a company invests resources in development. Short-term financing is allocated only for working capital. Therefore, we continue working with international financial institutions such as the IFC, the EBRD. We are open to any financing with good conditions. And since we have mentioned sugar, how does MHP diversify the possible risks of a decline in the main direction — chicken?
Viktoria Kapelyushnaya: As for poultry meat and diversification, it is important to keep a balance here. Our business is aimed at both the Ukrainian and the world market. In the domestic market, our sales depend on the income of the population. If there is income, everyone will win. On the other hand, there is a huge global market, the volume of world chicken trade is around 12-13 million tons. One of the priorities is the European market. But we do not revolve around it. We supply products to the markets of MENA countries, Africa and the CIS. If you create a competitive product, the market is limitless. As for diversification, keep in mind that we have a huge crop production sector. In addition, we continue monitoring and exploring the potential for new mergers and acquisitions abroad. Anna, the cases of Mriya and Creative Group have been mentioned. Recently, Agroinvestgroup joined the "club". What conclusions did EBRD draw from these defaults?
Anna Lebedynets: We followed closely these cases, but I cannot say that the bank has radically changed the view on the financing of agribusiness in Ukraine as an outcome. By and large, in any country, in any market, this could happen. But we have been working in the Ukrainian market for many years. We are very careful with the clients we finance, and, accordingly, we understand and see the difference between a good and a bad company. So one cannot judge by one company about all the others.
Vladyslav Vyniarsky: But it is curious that the banks lined up to Mriya. As far as I know, the EBRD after being repaid the first tranche had suspected something was up and did not issue the second one (smiles — ed.). Anna, what was the real deal?
Анна Лебединец: We had a project with Mriya, which was implemented as planned. At that time, having analyzed the company's financial statements, we came to the conclusion that we would delay our further cooperation. Irina, since TAS Agro is a subsidiary of TAS Group, the first thing that springs to mind is that one of your main financial donors is Tascombank. Is that true?
Irina Amelina: Oddly enough, Tascombank does not provide loans to TAS Agro. We have signed a loan agreement with Raiffeisen Bank Aval. We are also working on cooperation with OTP Leasing. In general, we try to work from our own resources. Last year, we harvested a very good yield, probably a record one. That allowed for a minimum use of credit funds. But, as I have said, in the long term we are considering cooperation programs with international financial organizations.
Tascombank does not provide loans to TAS Agro,
— Irina Amelina. The company is not much public. What is TAS Agro focusing on now?
Irina Amelina: We are actively working on establishing transparent, efficient and controlled business processes. The main focus is on processes optimization, and not on personnel. Personnel optimization — will be more as a result, but the control over production and other operations is the main thing. We are also working on innovative developments. GPS monitoring, fuel level sensors have been introduced. The process of implementing logistic control of crop management is underway. The Mobile Agronomist project is planned. We are pursuing to ensure that all processes are automated in a comprehensive manner and in full — from the start (plans, applications) to completion (reflected in the accounting and statements). Have you considered the introduction of processing?
Irina Amelina: Yes, such plans do exist given the land bank increase. And it's not just about vegetable oil production.

Doing white business in the grey market Several years ago, Ukraine exported more sunflower than it was officially produced. That mentions the shadow market of agricultural products. By various estimations, its size reaches 50 pct. What are your estimates? And in general, is it possible to do white business in Ukraine?
Irina Amelina: I think it is possible, and today our companies prove it. Since the first company appeared, we have been working "white" in all processes. All is good, but those who work in the shade spoil the picture much. Often these are farmers who work without documents, use cash and do not pay taxes. Of course, when a company operates legally and has legal restrictions on cash circulation and taxation, it is difficult to compete. Therefore, explanatory work is carried out with shareholders over the advantages of concluding an agreement with a transparent "white" company that works in the legal field of Ukraine, officially pays taxes, etc.
Anna Lebedynets: I find these estimates of the shadow market too high.
Vladyslav Vyniarsky: I agree, even at 40 pct it is overestimated. But almost all small farmers work with cash.
Yuliya Zhulanova: Yes, there is cash, but the farmer does not necessarily hide it. There are cash settlements not prohibited by the law, for example, for settlements with shareholders or salary payments, or depositing revenues into a bank account for further settlements with suppliers. In our experience, such farmers are quite open and understandable. As for the shadow players, in my opinion, it is not the primary producer. Rather these are private entrepreneurs trying to buy grain off the books at reduced prices and then resell it.

The producer may have unaccounted income as well. But even a small farmer with 200-300 hectares, registered as an enterprise, often works normally and clearly. What they show in their finances is acceptable to the bank. Another issue is financial literacy. Having worked for 15 years in the bank, unfortunately, I see little progress. For example, there are often balances when assets are not equal to liabilities, in such cases bank employees advise clients on what is wrong and how it can be corrected.
It is not the first priority for a farmer to be able to draw up a balance. These people know how to work the land, earn money, calculate profitability, how many resources are available and where to deliver them.
— Yuliya Zhulanova.
To be honest, it is not the first priority for a farmer to be able to draw up a balance. These people know how to work the land, earn money, calculate profitability, how many resources are available and where to deliver them. There are cases when a company loses crop and is on the verge of survival and, for obvious reasons, it cannot get additional credit. But the next season the farmer recovers and can pay for the obligations. This is the advantage of working with the land — the new season provides new opportunities.
Vladyslav Vyniarsky: I would like to say a few words about large and medium-sized companies. Many are aware of the risks of working in the shade. In this case, one deliberately makes a complicated legal structure. And what this may lead to? You go to the bank, and no one gives you money at an adequate rate. Strategically, no reasonable investor will work with a company that has a tangled organization. And this is to some extent the answer to the question of why it is more profitable to be white and transparent. Yes, you do not have situational gains every minute, but in the long run you win. Although, of course, there are many companies that do not think so and prefer working in the shade.
"Strategically, no reasonable investor will work with a company that has a tangled organization. And this is to some extent the answer to the question of why it is more profitable to be white and transparent," Vladyslav Vyniarsky.
Strategically, no reasonable investor will work with a company that has a tangled organization. And this is to some extent the answer to the question of why it is more profitable to be white and transparent,
— Vladyslav Vyniarsky.
In Ukraine, traditionally everyone is afraid to open up. But we have decided to show all the beneficiaries at the shareholder level. We have no history with registration in the Virgin Islands. Therefore, we opened accounts in a foreign bank in Cyprus quite easily.

It is ideal to do business as MHP does. It took the company 20 years of development to reach the level of perfection. As Viktoria has said, MHP offers Eurobonds at a 7-7.5 pct rate, while Ukraine offers at 11-12 pct. Indeed, this is a unique case when the company's rating is higher than that of the country. In our country, only MHP and Kernel are such trendsetters.
Viktoria Kapelyushnaya: I see that the number of companies doing white business is considerably growing. But, in fact, a "black" farmer is a truly complicated case. After all, such an agrarian with the help of cash easily gives today 12 pct of the normative monetary assessment of farmland for a share, and tomorrow — 15 pct. Today he is doing well, but tomorrow anything may happen.

My point is that one should not be afraid of such competition. I always say that if 2 or 3, well, even 10 shareholders will lease their land to a farmer, that's fine. For this, we must not make any concessions. Anyway, we are moving to a civilized market. By the way, with respect to the "black" agricultural market, this situation was largely defeated by the automatic blocking of tax invoices. The volume of shadow grain decreased and there are less illegal operations. Anna, it is a hackneyed question, still, what are your expectations from the launch of the land market? Will there be a financial and investment boom?
Anna Lebedynets: We expect it to finally open. But the question is in what form as it is still not clear. And the format of the market will depend on it. If the model implies that let's say only citizens of Ukraine can buy up to 100 hectares, and legal entities will not be able to buy land, then it is clear that the billion-dollar flow of investment will not occur. If there are other rules of the game, we get different results.

Besides, renting of land remains because most companies will continue to rent it from the owners, and will not redeem the entire land bank, which they cultivate. In addition, according to surveys, in the first year or two, only an insignificant part of shareholders are ready to sell it after launching the land market. So I don't see instant fundamental changes. They will come gradually.
Vladyslav Vyniarsky: A brief remark about the land and finance market. Last year we bought the company from Kernel. When we came to the bank and presented corporate rights as collateral, we are asked: "What will we do with them? Where do we put them in pledge, what reserves will we close? Give us an elevator, a plant or a terminal."
A large-scale redistribution of the land market in Ukraine is coming, a big consolidation, and for someone — a reconsolidation,
— Vladyslav Vyniarsky.
Therefore, as a financier and a former banker, I am both hands on the land market, as it will become a pledge. Although we have to be ready for it. If you are completely grey or even black, you will not get access to funds. In my opinion, a large-scale redistribution of the land market in Ukraine is coming, a big consolidation, and for someone — a reconsolidation. These will be huge investments and capital, but only for those who are ready for this. Thank you for the interesting conversation!
Completed withDisqus