Category: Uncategorized

It is trite these days to observe that financial crises that originate in the United States hit Europe harder and last longer than they do in the United States itself. It appears to be an equal truism that, within the varied economies of continental Europe, such crises move slowly but inexorably eastwards, with increasing depth and longevity. This is the general backdrop to the experience of the credit markets in CEE since at least 2009. In addition, political events, some related to the credit crisis and some not, have exacerbated its effects, particularly in the last 12 months, and look set to have a lasting impact into 2015 and beyond. Legal developments, too, have contributed to a sense of instability, in some cases regardless of the merits of the new rules adopted (cf. the new Czech Civil Code).

Although often spoken of as a single region, CEE is loosely divided into sub-regions that have experienced the effects of the credit crisis unevenly. Central Europe (CE), consisting of Poland, the Czech Republic, Slovakia, Slovenia and Hungary, is relatively more developed than the other sub-regions, with a consequentially greater capacity to attract FDI than the others (though political conditions in Hungary are already narrowing its earlier promise). Southern and Eastern Europe (SEE), consisting of the Western Balkans, Serbia, Croatia, Romania, and Bulgaria (the latter three fortunate enough to have achieved EU membership), offer less attractive investment environments both economically and legally. The reduction of investment and exit opportunities in these markets consequent on a more restrained credit environment has resulted in a palpable and rapid decline in transactions, with a few privatization and infrastructure projects to lighten the gloom. 

The most dramatic change, though, has been in the third sub-region, the Commonwealth of Independent States (CIS) and other former-USSR countries, and is largely unrelated to the economic crisis per se. Both political events and the turnaround in US oil and gas production capacity (a political development in itself) have turned already weakening Russian growth into another example of the inherent flaws of a resource-based economy, as well as the dangers of political adventurism in an increasingly globalized world.

For banks active in the region, these macroeconomic conditions have conspired with the particular challenges of the European banking sector post-crisis to reduce lending capacity and (employable) liquidity, while at the same time increasing competition, with consequent effects on yield. The past year has been characterized by over-subscriptions for large investment-grade facilities and acquisition facilities for significant regional financial sponsors and (less so) strategic investors, with the remaining activity generally involving refinancing or covenant amendment of existing credits rather than a healthy level of mid-tier, new-money lending. 

On the borrower side, CFOs of sub-investment-grade companies face less accommodating senior banks and are increasingly turning to other funding sources. We have already seen bank/bond transactions in the Czech Republic (EPE), Bulgaria (Vivacom), and Croatia (Agrokor), and this market will continue to make inroads in 2015 as the senior bank market makes its slow way to recovery and local companies improve their financial reporting and company structures to become issuers. How long before we see the first USD-denominated term loan B closed on purely CEE-based credit?

And the road ahead for senior banks appears to be very challenging indeed. Notwithstanding the attempts by national and international institutions, including the European Commission and European Central Bank, to spur economic growth in the EU and its periphery (most notably, the ECB holding interest rates well down), banks have not been entirely successful in finding creditworthy pathways to pass the benefit on to the commercial sector and contribute to regional economic growth. High leverage has made the banks risk-averse, decreasing the leverage on offer to borrowers and increasing expectations with respect to collateral packages. Projects that, even a few years ago, would have seemed viable or even attractive are not able to find the funding necessary to launch. Tightening capital requirements have coincided with a rise in NPLs and a battening-down of bank balance sheets in a low-growth/risk-aversion cycle characteristic of economic stagnation. Some observers have expressed the view that NPLs are the single most important factor in the restriction of the credit supply in Europe, with the problem being greater the further east and south you go. These circumstances are not likely to improve in 2015. 

In addition to the challenging (though variable) economic circumstances in the three sub-regions, the legal environments of CEE countries present differing challenges to creditor enforcement and value realization relative to the rest of Europe, and though some legal regimes have undergone a certain degree of updating and renewal, particularly with respect to creditors’ rights, capital flight has nevertheless occurred to jurisdictions with more settled, creditor-friendly laws. 

One positive response to this in the market has been the more widespread implementation of English law in loan and inter-creditor arrangements which, although still dependent on local rules with respect to the enforcement of security, nevertheless often provides a greater degree of flexibility and reliability than local law. In addition, we have seen creditors to distressed credits resorting to UK schemes of arrangement as an alternative to piecemeal enforcement or local bankruptcy regimes, to achieve positive (from the point of view of senior banks and the companies themselves) results, using English law financing agreements as the jurisdictional “hook” on which the competency of the High Court is hung (cf. Vivacom, Cognor). The encroachment of English law also supports the implementation of bank/bond and other complex structures with multiple and fluid investor classes, a natural accompaniment to the hunt for alternative financing by local CFOs. 

We expect this shift towards English law and more complex, mixed-tranche transactions, at least for higher-value credits, to continue and have positioned ourselves accordingly. With senior, English-qualified staff across the region, we are helping banks and borrowers navigate the changing landscape and take advantage of the opportunities that all change ultimately presents.

Jonathan Weinberg, Partner, White & Case

This Article was originally published in the Special Year-End Issue of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

When I began working in Central and Eastern Europe in the early 1990’s, the region was undergoing fundamental changes. The transformation of the former command systems operating in the countries of the region into Western style market economies has proceeded by way of different means and at varying speeds, and some countries have undoubtedly adapted better than others. But one thing there can be no doubt about is that the entire region is very different today from the rather drab, soulless place that I first visited in 1990.

The “early days” were most certainly challenging for an English-qualified lawyer with very little knowledge of the local languages. Polish legislation was typically published several months after it came in to force. My application to open a business account at one of Poland’s largest banks was rejected because “the bank is full.” There was a two year waiting list for telephone lines in Hungary, and when you finally succeeded to get a line the connection would often fail when it rained!

From these (for me at least!) rather unpromising beginnings, CEE became one of the fastest growing economic regions in the World. Much of the initial investment took place in the Czech and Slovak Republics, Hungary, Poland and Russia, with the transition in the former Yugoslavia largely postponed pending the end of the hostilities in the region in the mid/late 1990’s. 

A particularly important contributory factor in this period of transformation was the adoption by most CEE countries of privatization programs – through voucher/mass-privatization schemes (in Russia, the Czech Republic and many of the former CIS countries), sector-strategic sales (e.g. in Hungary, Romania, Bulgaria), stock market offerings (in Hungary, Estonia, Russia), or – in most cases – a combination of the three. 

Although every country used a variety of privatization methods, the overall effect on the region as a whole was a remarkable shift from public to private ownership, with the majority of economic activity transferred from State to private hands in little more than a decade.

Looking back from late 2014, how successful has the privatization experiment in CEE been? There is no doubt that the message is mixed – I have met a number of prominent names in the region in recent months who have questioned the “successes” of some of the former programs. This is particularly true of some of the larger privatized utilities, where increasing prices and poor service (which is inevitably connected by the detractors of privatization with foreign investor “profiteering” and excessive redundancy programs) has led to public dissatisfaction. Whilst the State may have received significant sales proceeds, this does not always mean that the political decision to sell is still considered to have been right. [This statement applies equally to a number of historic privatizations in the United Kingdom!].

The decision of the Hungarian Government to re-purchase MKB from Bayern LB in the summer of 2014 (for a fraction of the price paid by Bayern in 1994-6) marked a fundamental change from the past when the majority of Hungary’s commercial banks were privatized. Prime Minister Orban has been quoted as saying that he wants to see “at least” 50% of the Hungarian banking system in domestic hands, and has adopted a similar approach to the energy and communications sectors (which again, were largely privatized in the 1990’s). More recently, Romanian President Basescu has called for the nationalization of the Russian-owned Ploiesti oil refinery (a move rejected by Prime Minister Ponta).

But while it is perhaps easy to be critical about some of the decisions that were made, particularly in the early days, one has to remember the context. As EBRD wrote at the time, “There is no historical precedent for the process of change now underway.” Yes, mistakes were (we see with hindsight) made – but what would have happened if privatization had not been implemented on such a wide scale?

In this context, it is interesting to follow recent developments in Slovenia, where Prime Minister Cerar has committed to proceed with the planned privatization of Telekom Slovenia and a number of other State assets. This despite the fact that two members of the coalition government have opposed a large scale sell-off of State assets. With foreign direct investment in the region still significantly less than it was during the period before the global financial crisis in 2008, this will clearly be challenging; the second failure of the Kosovo government to privatize Post and Telecommunications Kosovo last year provides an indication of the difficulties that may lie ahead.

So how does 2015 look? Economic growth is projected to be lower in CEE than most other regions in the World, and the attractiveness of the region as a destination for foreign direct investment has been adversely impacted by the apparently negative approach to foreign investment in a number of the countries in the region. There is no question that the ongoing tension between Russia and Ukraine has a wider impact than just within the borders of those two countries. Countries which are relatively large exporters to Russia and Ukraine, such as Hungary, Lithuania and Poland, could in particular be negatively affected in the event of the imposition of significant economic sanctions against the Russian Federation and/or a disruption in the flow of natural gas through Ukraine. And foreign investment in the CIS countries is likely to continue to be adversely affected while the current uncertainty continues.

That having been said, almost all CEE countries are expected to register positive growth rates in 2015. And I hear optimistic comments from many correspondent lawyers and intermediaries based in the region about business prospects in 2015.

One thing I can be sure about – it will certainly be easier to open a bank account in Poland than it was in 1992!

David Shasha, Senior Consultant, Watson Farley & Williams

This Article was originally published in the Special Year-End Issue of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

As someone with well over a decade of experience of living in Bucharest and working within Central Europe, the past and present of the region is simultaneously on my mind. 

While we have seen enormous changes that are visible to everyone travelling to CEE countries, there are old haunts that still survive.

What has not changed in the last 10 years is the perception by the rest of Europe that CEE is “different”; and, paradoxically, the desire of each CEE country to distinguish itself from all the others is equally there. Both phenomena pose everyday challenges to deal with if you are managing a law practice, or indeed any other international business.

What I am here to say about 2014 is not just true for the current year. As life in business is fast and fast changing, it may well have been true for the last two or three years.

First, about the legal market, which seems to have maintained a slow but dynamic growth – though possibly at a pace less obvious than most of us law firm managers would like. Although statistics about the CEE legal sector are hard to find and less in the public domain than they are in most developed markets, it is well known that, in line with global trends, those in the lead with a well-established client base and brand are growing faster than some of the challengers.

Overall, I see in most CEE markets a degree of stabilization, which can be described in the following simple terms: (1) the slowing down of people’s movement – a stabilization of offices among peer group firms in terms of size; (2) the accomodation of the status quo, in that there is a shared understanding of the need to be innovative and flexible when it comes to structuring fees; this being the direct result of (3) clients becoming more demanding and selective when decisions on the selection of external counsel are taken; (4) the rise of national law firms, which, overall, has given a new dimension to the competitive landscape; and – last but not least – (5) no major new entries or departures seen or expected, so that it appears that today’s legal market is possibly here to stay for some time to come.

As far as the business environment is concerned, there is also a status quo developing that sets the scene for new challenges and opportunities in 2015. CEE has never been precisely defined, either geographically or otherwise. Some businesses include SEE and the former Yugoslavian nations in their understanding of the region, others extend the definition to the Baltic states and often to Ukraine. For us at Noerr, CEE includes the five countries (Czech, Hungary, Poland, Romania and Slovakia), where we are present – but we also regard the wider CEE (including South Eastern Europe) as a natural extension of the core markets and a potential geography for doing business as well. 

In spite of the political turmoil of late in our next door neighbourhood, we have experienced a degree of stabilization across the markets in respect of business activity as a whole.

Although market volatility fuelled by government policy pops its head up in many countries from time to time, investors have developed a better understanding over the decades of how to deal with uncertainties resulting from government intervention or unpredictable policy making. As businesses aspire to find new destinations, CEE, although certainly less sexy today than it was after EU accession 10 years ago, is still seen by many as an obvious place to go, and a land of perhaps modest but still attractive opportunities. Among the newcomers are an increasing number of Asian investors.

For a law firm like Noerr, whose principal business is in Germany, it is particularly good news that the German economy is back on a growth track, and we cannot deny that the well-being of our region is still very much dependent on how German firms perform and how confident German and other West-European and US investors are in the region. 

Looking ahead to 2015, I do not foresee any dramatic changes, as the economy does not jump or fall according to the calendar. However, having browsed through various EU forecasts and analyses, it appears the region continues to be seen as one producing higher than EU-average GDP growth, and all in all the outlook is positive for its core markets.

As global M&A activities are expected to increase, companies in CEE are also hoping to get a fair share of them, for example in the private equity, telecom, and energy sectors. We also see the property market as being stable and offering new investment opportunities. We look at the overall outlook with the same cautious optimism as we have done in recent years.

In conclusion, CEE has retained its character as a niche but stable market that has been successful in adapting to market challenges in the last 20 years or so, 

For Noerr, CEE is an important market where we aim to achieve an increased level of regional integration, and we aim to be seen as a truly regional top-quality advisory force with a powerful backup from Germany.

Joerg Menzer, Managing Partner, Noerr, Bucharest, Budapest, and Bratislava

This Article was originally published in the Special Year-End Issue of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Karanovic & Nikolic is a leading law firm in South East Europe with offices in Serbia, Montenegro, Bosnia (both in Sarajevo and Banja Luka), Croatia, Macedonia – and now Slovenia, which we are pleased to announce has just opened. We are a full-service integrated firm with over 100 lawyers and growing.

2014 has been an exciting year for the firm, which achieved the anticipated growth despite the ongoing legal strike in Serbia, which impacted our last quarter. The top transactions of a regional character were the Agrokor/ Mercator deal (where we played a strong role in competition and other matters), and the sale of SBB to KKR (where we advised MidEuropa Partners on their Euro 1 billion regional exit). This latter deal is of major significance for the region as it represents a successful exit in a consolidated business throughout the former Yugoslavia, an approach which we expect to emerge as a regional trend. KKR has declared its intention to continue pursuing a consolidation strategy, with the aim of possibly listing the company on the Warsaw stock exchange or selling it to a mobile phone operator willing to offer other services to its customers.

Looking to 2015 I would like to focus a little on what we may expect. Certainly global markets have recovered slightly – predominantly in the US, which is seeing an increased number of very large transactions with high pricings. The appetite within Europe remains sluggish, and international conflicts, still-low consumer confidence, and uninspiring institutional leadership have resulted in limited deal flow. In South East Europe – with the exception of a few highlights – there has been little transactional activity of substantial size. The long-awaited restructurings have been slow to emerge, although I do expect them finally to arrive in 2015. Serbia will see its last privatizations and Slovenia will remain a hotbed of activity. 

The impact of the Ukranian crisis will never be far away, and it will threaten not only our region but all of Europe if we cannot avoid the escalation of military aggression from Russia. So far it appears that we have not been able to dampen it, and as a result there will be an unstable political climate in 2015. 

On the other hand there are a large number of investors appearing in South East Europe for whom unstable environments are less off-putting. Serbia in particular has seen more than its fair share of investment from the UAE, China, Azerbaijan, and Russia, and we expect this trend to continue in all non-EU states. This investment takes the form mostly of state financial institutions investing in a portfolio of activities, including infrastructure projects and projects in the energy sector, real estate, and banking. We also expect renewed interest in natural resources and telecom next year.

Much of the investment in the region has been in large scale infrastructure projects. Recent announcements in Serbia include the 528 kilometres of railroad planned to be built over the next three years. The City of Belgrade has also announced several projects which have quickly become part of the national discussion, including the Belgrade Metro project, which – aside from being one of the most talked about – is probably the longest in the making (it is planned to begin by 2016). Sanitary issues presented by the Vinca sanitary landfill will also be tackled with the construction of a co-generative facility with separation and recycling facilities in a EUR 250-300 million investment. The city has also announced plans to construct four underground parking garages in the spring of 2015. The Serbian government has also announced plans to offer a twenty year concession for the development of the Belgrade airport, an investment valued at approximately USD 1 billion.

Similarly, Macedonia is currently using PPP for its financing model for the construction of Corridor XIII. Electricity is another big story dominating the investment scene, with nearly 70 small hydro power plants under construction that are expected to be fully operational by 2015. It is also expected that the first wind power plant, in Bogdanci, will become operational. The park is an investment worth EUR 55 million with an installed capacity of 36.8 MW.

Bosnia & Herzegovina, although a relatively small country, has enormous energy potential. The country is able to fully satisfy domestic electricity demand and export to neighbouring countries as well. However, energy production capabilities have not been fully exploited and there is significant opportunity in this area, which is a key area of interest for foreign investment. The Chinese have invested heavily in the Stanari thermal power plant, which is scheduled to be completed in late 2016 and will produce up to 2 million MWh of energy per year. The China Development Bank provided a EUR 350 million loan for the construction of the facility and Dongfang Electric Corporation was recently hired to build it. The oil company Shell has expressed their interest in a concession agreement with the Government of Bosnia & Herzegovina for oil exploration and recently tenders for the construction of another thermal power plant in Banovici have also been announced.

Croatia also saw its first offshore tender this year in a licensing procedure to grant a 30-year license for the exploration and production of hydrocarbons on part of the continental shelf of the Croatian portion of the Adriatic. Montenegro also initiated tender procedures for exploration of the southern and eastern part of the Montenegrin sea floor, and negotiation with the bidders are expected to be completed by the end of the year. Both countries have agreed to joint participation in the project in the spirit of good cooperation and economic prosperity for the regional economy.

All in all throughout the former Yugoslavia there are many opportunities keeping the firm busy and we hope 2015 will remain stable and growing.

Patricia Gannon, Senior Partner, Karanovic & Nikolic

This Article was originally published in the Special Year-End Issue of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

We at Freshfields Bruckhaus Deringer remain very busy across the entire CEE region. We have been continuing to grow our revenues in the region year on year, and it seems that the ongoing year will be another good one. In terms of sector and client groups, we focus on those areas which are most active, i.e. FIG, GFI, Energy, TMT, and Infrastructure. In terms of practice groups, for instance, our disputes team continues to be busy with investment arbitration disputes across the region. We are also seeing a good number of debt and equity capital markets deals, as well as a decent amount of M&A work in the banking, energy, and infrastructure sectors. Our banking and finance teams are keeping busy with sales of non-performing loans.

Markets with Potential for 2015

The region as a whole, in the last 25 years, has seen uneven but strong economic growth. Its strategic location, educated workforce, and low-cost labor have attracted a high level of FDI. The result is that the gap between western Europe and CEE has narrowed and CEE private companies have grown significantly. The potential I see is that these companies are now looking for financing and are branching out in the region and internationally. 

In terms of markets with the most potential for legal work, certainly Poland needs to be mentioned, as well as the Czech Republic and the Slovak Republic. Hungary is a busy market given the current political situation. Croatia and Slovenia are undergoing further privatization. Some say that Romania should be an interesting market given the recent change in government. A number of legal battles are ongoing in Bulgaria, both in the energy sector and in the banking sector. 

The answer to that question may also depend on where the private equity funds find interesting assets, either due to exits of foreign investors or coming from other opportunities, such as the sale of non-performing portfolios (an issue especially in the Balkans, given the high value of bad loans there). 

Are Capital Markets in CEE Essentially “Dead”?

Both Bulgaria and Romania had several capital markets transactions this year, including high-yield sovereign as well as large corporate issuances. Also, according to the recent undertaking of the ECB to revive securitizations in Europe and to purchase some eligible securities as part of its quantitative easing, European capital markets as a whole are expected to get more active in 2015, which will in turn have a positive impact on the region. 

The Baltics and the Balkans: Potential for Regional Firms? 

The Baltic countries seem to be much more integrated than the Balkan countries. Maybe this is the reason why in the Baltics a number of strong integrated firms emerged a number of years ago. In the Balkans, we have so far only seen law firm alliances, and history will show if there is enough business, both within the Balkan countries and also from outside into the region to allow alliances to prosper. 

Legislative/Regulatory Changes

In general, each EU member state made regulatory and legislative changes in order to comply with EU-driven regulatory requirements, such as those set forth in – for example – Basel III, EMIR, and RRD. Other governments, such as those in Hungary, the Czech Republic, and Romania, have introduced new civil codes, making the contractual framework of local and cross border transactions more sophisticated. More problematic issues such as the foreign denominated loans on the Hungarian market are slowly being solved, as the FX loans will be converted into HUF under a new program implemented by the National Bank of Hungary. We also see emerging trends from the Balkan countries to address the problem of non-performing loans. 

International Law firms in CEE

The CEE legal markets are not easy to operate in. Freshfields has a long history in the region, and we have had our own offices in Hungary, Slovakia, and the Czech Republic. Through these offices, we capitalized on the massive investments from Austria, Germany, and other western European markets into CEE in the mid-90’s. 

Soon after the merger with Freshfields in 2000 we looked at the region and realized that we could not have offices in all markets that were booming at the time. For example, Poland was a huge market but was already flooded in terms of legal services. We also reached the conclusion that it was not realistic to expect to successfully grow what we believed to be a “real Freshfields” office in each of these markets – a true full-service firm and top ranked across the board. It would have also implied a lot of handholding of the local teams, which we did not feel worked with our overall strategy. We changed our strategy to cooperating with 2 or 3 top firms in each of the CEE countries, which allows us to bring the best qualified people to each job, a must for a firm like ours. 

Freshfields was, as we all know, not the only international firm to take this approach. Our current model – which we practice on a worldwide level – is working very well for us, as a third of our global revenue comes from jurisdictions where we do not have offices.

Turkey

Turkey certainly continues to be a very exciting market for us. The underlying economic fundamentals remain strong – GDP at USD 820 billion, up 3.8%; FDI at USD 12.6 billion in 2013. Turkey has a cost-competitive labor force, is experiencing growing private consumption, and is a strategic location for expansion, all positive factors for growth. The sectors that we see offering the greatest opportunities for international investors in that country include energy, agriculture, healthcare, retail, and financial services. 

Quite in contrast to the positive economic factors, however, the Turkish legal market is one of the most difficult in the region. There is a fierce price war going on, partly triggered by new market entrants – both international firms and local newcomers – but also caused by the tradition of Turkish corporates using in-house counsel rather than engaging (and paying good fees to) external law firms.

How Welcome are Short-Term “Emergency” Situations, Such as Those in Ukraine and Hungary?

Generally, we prefer stable markets, although of course we regularly deal with crisis situations and we always serve our clients under challenging circumstances. Short term emergencies in our experience often do not change the volume of work, they just change its scope.

Willibald Plesser, Co-Head CEE/CIS, Freshfields Bruckhaus Deringer

This Article was originally published in the Special Year-End Issue of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

A commercial loan agreement is what comes to mind for most people when it comes to obtaining credit either from a credit institution or from another suitable lender. However, such agreements are not the only way of raising money, and capital markets traditionally provide debtors with alternative ways to finance their business and other activities. These forms include, inter alia, bond issues and initial (and subsequent) public offerings (IPOs).

Easing money through capital markets is at the very least a little bit more complex and sophisticated than concluding a standard (plain vanilla) loan agreement. On the other hand, commercial considerations make these financing methods reliable, efficient, and attractive. First of all, it is the debtor and not the lender who keeps control of the level of interest to be paid in connection with the transaction. Secondly, both bond issues and IPOs make it possible to avoid problems with the availability of funds from credit institutions. This is becoming an important issue in connection with steadily increasing requirements for loans provided via the bank sector, putting aside credit crunches and other disruptions in money supply. And last but not least, financing through capital markets creates publicity that could enhance the ability of the debtor to enter these markets again in the future and take advantage of being already familiar to market participants.

It is also true that financing through capital markets is usually connected with a higher level of disclosure of sensitive internal information, especially for transactions where a public offering takes place. In addition, the debtor has only a limited influence on who will qualify as the lender, and structuring and performance of a capital markets transaction may be a little bit more expensive than negotiating, concluding, and fulfilling a loan agreement.

The situation in financing in the Czech Republic has changed slightly in recent years. After a long period when loan agreements dominated the market, now more and more debtors prefer to obtain their financing via corporate bond issues marketed either as a private placement or a public offering. In addition, the Czech capital market has been ranked for a long time as a developed or emerging market according to country classification models used by reputable and independent evaluators such as STOXX, FTSE, and MSCI. These models show that the market is considered to be sufficiently robust and stable to operate current bond and securities issues and possibly absorb new ones. 

In recent years even credit institutions have supported bond issues and participated in the transactions as managers and underwriters. Their networks of clients and the private networks operated by the investment firms and investment intermediaries jointly form a sufficient group of investors that could be targeted by new credible bond issues offering a mix of competitive interest, liquidity, and acceptable risk.

At least two capital markets transactions in 2014 deserve to be highlighted. The first was the issue of hybrid corporate bonds by J&T Bank, the first perpetual bonds creditable to Tier 1 capital issued by a bank in the Czech Republic. The second was the first IPO governed mainly by Czech law of a medium-size company, the brewery group Pivovary Lobkowicz Group, a.s. (The other IPOs were mainly dual listings primarily governed by the law of another state, as it was not possible to perform the IPO in accordance with international standards due the lack of flexibility in Czech law regarding effectivity of capital increases. This substantial obstacle has been eliminated by the new Companies Act, and this transaction was the first one utilizing this newly acquired legal flexibility). This transaction has shown that not only the biggest internationally operating companies are eligible for IPOs, but also that companies with turnover of about EUR 50 million may easily qualify for public offerings. It has also proven that IPOs can be an effective and efficient way of raising finance and entering capital markets, even for medium-sized companies. 

Developments in 2014 indicate that the Czech capital market, although not very large, has shown quite a high degree of innovation. It has introduced new products and concluded transactions that have not been carried out in the past. In addition, the rising demand for corporate bond issues – hand in hand with stronger bank regulations – will very likely result in wider use of capital markets and development of more complex and sophisticated products tailor-made to the needs and expectations of the debtors and possible investors.

By Jan Topinka, Partner, and Vitezslav Semora, Senior Associate, Havel, Holasek & Partners

This Article was originally published in Issue 6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Croatia broke away from the eastern block and joined the western “capitalist” club in the early nineties. However, the first ten years were largely spent in fighting the war for independence, building political and legal institutions, and seeking social stability. Only in the beginning of the twenty-first century did the broader business and professional community discover one of the trademark features of the capitalist economy – open capital markets. Free of memories of market crashes and riding high on the belief that capital markets (especially equity markets) create only winners, investors rushed to engage brokers, purchase stocks, and stockpile various investment products. The bubbles that were being inflated around the world helped overcome the traditional mistrust of the new and untested. Companies were going public and there was news of IPOs on an almost daily basis; seemingly everyone was purchasing shares and closely following the news from the Zagreb Stock Exchange. In the meantime, the Croatian fund industry was greatly benefiting from the market optimism.

While Croatia enacted the first Investment Funds Act back in 1995 and licensed the first management company in 1997, the start of real growth can be traced to the early 2000s, when management companies, investment funds, and their assets started to grow considerably. The progress was solidified with the introduction of the new Investment Funds Act in 2005. The act was aimed at aligning Croatian legislation with applicable EU policies (UCITS III directives), preparing local fund managers for (or, more accurately, shielding them from) foreign competition, and differentiating between types of investment funds (most notably between open-end and closed-end investment funds and between public and private offerings). In addition, the act introduced new mechanisms for investor protection (e.g. portfolio restrictions and broader control of the Croatian Financial Services Supervisory Agency) and thus, at least indirectly, stimulated a new round of investments. As a result, at the end of 2007 there were 100 registered open investment funds (up from 59 in 2006) managing about EUR 4 billion in assets (up from about 2 billion in 2006).

As it usually goes, in 2008, at the peak of the investment hype in Croatia, the whole system came crumbling down. The worldwide financial breakdown started a downward spiral in the debt-fueled Croatian economy and strongly affected fragile Croatian capital markets. Private investors largely fled, institutional investors (e.g. mandatory pension funds), were being used to finance state budget deficits, and companies started to look for other sources of financing. The impact on investment funds was sudden and dramatic. By February 2009 the assets managed by the open-ended investment funds fell to about EUR 1 billion. It was largely expected that this market climate, coupled with the imminent threat from EU-based competition, would lead to the complete demise of the investment fund industry. 

The following years were indeed challenging for investment funds in Croatia. Many funds and managing companies exited the market, while the survivors took great hits to the value of assets and number of investors. However, we have recently seen signs of stabilization and maybe even of timid optimism. First, the value of assets managed by investment funds appears to be on steady rise from the beginning of this year. While the industry will almost certainly never reach the levels of the pre-crisis heyday, by October, 2014, UCITS funds were managing assets valued at about EUR 1.8 billion with an annual growth of about 7%. Second, recent legislative activity seems to have helped restore not only the interest of the professional community but also a level of investor confidence. In an effort to align local laws with the relevant EU instruments, in 2013 Croatia adopted a new Act on Open-Ended Investment Funds with Public Offering by implementing the UCITS IV Directive and the Act on Alternative Investment Funds by implementing the AIMF Directive. Both of these statutes are currently undergoing changes primarily aimed at further aligning them with EU rules (e.g. by decreasing dependency on credit agencies) and at strengthening instruments for investor protection. Finally, a newly introduced tax on interest (going into effect on January 1, 2015) may trigger a migration of additional investments to the capital markets and fund industry.

These developments may help in reviving and repositioning investment funds as an important element for proper functioning of capital markets. However, taking into account the bleak outlook of the Croatian economy and the presence of established competitors from EU countries (there are currently 27 foreign management companies registered with the Croatian regulator), any adversity – such as the announced introduction of a capital gains tax –  or glitch in world markets may push the industry back to the abyss.

By Boris Andrejas, Partner, Babic & Partners Law Firm

This Article was originally published in Issue 6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

In 2014, Bulgaria experienced its first major bank failure in more than 15 years when, on June 20, the Corporate Commercial Bank (“CorpBank”), the country’s fourth largest bank by assets, closed its doors. Although the bank closed initially in order to be rehabilitated, it never reopened, and its banking license was revoked on November 6. Bankruptcy is impending, even though the decision of the Bulgarian National Bank (the “BNB”), the bank’s supervising authority, is being appealed.

This downfall was largely unexpected. Indeed, over time CorpBank was increasingly perceived as favored by politicians (and, thus, its falling out of favor may have been the cause or at least the trigger of the demise). Its business model, being riskier and more merchant-bank-like, stood apart from that of other banks. Nonetheless, CorpBank had been regarded as a relatively stable institution by the BNB, the bank’s external auditor (a Big Four firm), the Financial Supervision Commission (the “FSC”, supervising CorpBank as a publicly traded company), the stock exchange, a major rating agency, and indeed most of the bank’s counterparts.  

Banks do fail, of course. But it was an even greater shock when the BNB, basing its statements upon an “analysis and assessment” of CorpBank’s assets prepared by an ad hoc combined team of three audit firms (two from Big Four, and the third a major local one), announced on October 22 that CorpBank had to pare its assets by BGN 4.22 billion – i.e. by about USD 2.7 billion – out of a total of BGN 6.66 in assets as of September 30. Only six months earlier, the BNB had allowed CorpBank to purchase Bulgaria’s 21st largest bank (in terms of assets), with presumably a good understanding of CorpBank’s financial health. So, if CorpBank turned out to be a financial pyramid, as some claim, was it a regulated and supervised financial pyramid? 

The aftermath of the downfall of CorpBank is fairly gloomy. The estimated shortage of BGN 1.7 billion (more than USD 1 billion) in the deposit guarantee fund (which, after a delay that has not gone unnoticed by EU institutions, was to start paying out to guaranteed depositors on December 4) is to be replenished by local and external sovereign borrowing, which will increase the overall sovereign debt of Bulgaria well beyond earlier projections. (Fortunately, Bulgaria is still among the least debt-burdened EU states.) This is only one of the expected direct losses to the economy. There are others, as well as indirect losses: many businesses, including several major companies, are expected to lose significant funds in the CorpBank bankruptcy, and there will be possible business closures, layoffs and increased unemployment, as well as litigation against Bulgaria for alleged mismanagement of the CorpBank situation. 

CorpBank’s downfall will affect Bulgarian capital markets, too, in at least three dimensions. 

First, on the regulatory and supervisory side, an old question arises again: Should this country’s bifurcated financial supervision be merged? Credit and payment institutions are looked after by the BNB and the remainder of the financial services sector by the FSC. CorpBank was supervised by both institutions, but no doubt its major watchdog was the BNB. It appears that the BNB failed quite dramatically with CorpBank – a failure that was unpredicted, as Bulgaria boasts a stable banking system. 

The role of the FSC in overseeing CorpBank as a public company (and in relation to the Markets in Financial Instruments Directive 2004/39/EC) was much less critical. But if the FSC had detected and acted upon signs of problems with CorpBank, would that have been sufficient to put out the fire? Probably not, given both the complexity of institutions like CorpBank and the intra-institutional framework. Would a merged financial supervisory authority, across the financial sector and including prudential conduct-of-business oversight, have worked better? Probably not, but the subject is worth considering. This analysis may become less relevant if Bulgaria, a non-Eurozone country, does apply to join EU’s Single Supervisory Mechanism, a proposition that now has many political and public supporters.

The second way the CorpBank downfall is likely to affect Bulgarian capital markets arises from its August 8 default on its indirectly-issued ISE-listed bonds. This small issue of USD 150 million may cause a big problem with corporate bond issuances from Bulgaria. 2013 and early 2014 seemed fairly successful in this respect, with some EUR 1 billion of corporate bond issuances from or related to Bulgaria, including a major issuance by a state-owned holding and a high-yield bond issuance, both fairly successful. 2015 is unlikely to be as successful, especially if CorpBank’s bondholders litigate against Bulgaria, as they have threatened to do. 

Third, a number of local financial institutions held funds with, or had invested in equities of, CorpBank. They will incur losses too. 

Despite all this, there is some room for optimism. The processes of bankruptcy management, of financial regulation and supervision, and of law-making, and the workings of the judiciary, will be in the public focus for years to come – even more than usual – which in the end should bring the better out of these processes.

By Nikolay Bebov, Partner, Tsvetkova Bebov Komarevski

This Article was originally published in Issue 6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The call of emerging and frontier markets has been a tempting one for the private equity industry. The higher risk of emerging market private equity has often been touted as the quid pro quo for opportunities that generate higher returns. However, as political and social unrest continue to stir across different parts of the region, the industry is recalibrating its attitude to the lingering question of ‘political risk.’

Whether GPs are being driven by development-focused DFI money or swash-buckling private LPs with bullish allocations to emerging markets, private equity has often found itself at the tip of the spear of institutional investment into the region. But today many formerly stable economies – both high-growth and developed – are facing unrest and/or changes in their perception of political risk. Several countries in the region over the past year have seen industrial action, mass demonstrations, civil war, and even full-scale armed conflict – adversely impacting many (politically and/or economically stable) neighboring countries through ‘regional association.’

Aside from dampening overall LP appetite for the region, this is also having another affect – a decrease in support for country-specific funds. Just a few years ago, funds targeting single countries were very much in vogue. At Edwards Wildman Palmer, we work with funds throughout the CEEMENA region (Central & Eastern Europe, Middle East and Northern Africa) and have seen GPs raise capital exclusively for high-profile, high-growth markets like Turkey; unfashionable markets like Ukraine; and, even less fashionable, post-conflict markets like Iraq.

To a limited partner in 2009, a Turkey-focused fund looked very attractive – particularly in comparison to recession-besieged neighbors. Turkey was outside of core private equity markets, but the impressive economic growth and favorable demographics made it a compelling macro play. In 2012, private equity firms raised a total of EUR 1.7 billion to invest exclusively in Turkey, as limited partners sought to tap into the growth story.

Since June of last year, when protests about urban development escalated into widespread demonstrations, the environment has changed dramatically, and it has become much more difficult for GPs to raise capital for or invest capital in Turkey. Political uncertainty suddenly made it very hard to transact. Whilst many perceive the environment to have become more stable since the elections earlier in the year and transactions are back on the agenda, things are admittedly moving at a much slower pace in Turkey. 

As we have seen, political instability can choke deal flow and derail fundraising processes, casting doubt on a general partner’s future. However, the type of conflict currently underway in the likes of Ukraine and Iraq is another thing altogether. For general partners operating in a country that becomes subject to armed conflict, it can prove ‘terminal’ as LPs quickly decide to cut their losses.

There typically is no trigger clause in a limited partnership agreement that automatically frees an LP from its fund commitment in the event of civil unrest or conflict. If the environment does deteriorate to the extent the LPs reasonably want to cancel their exposure, however, they generally have two obvious options: either they can exercise a “no fault divorce” clause, which is fairly typical but requires a supermajority vote, or they can just default on their capital commitment and assume/ hope that the GP won’t go to extraordinary lengths to pursue them. If the political situation is sufficiently unstable, the LPs generally will not have a problem achieving the necessary supermajority.

Funds with the ability to invest on a pan-regional basis have maintained significantly better investment prospects than their single-country-focused counterparts. The optionality of different markets in which to invest has proved critical for funds investing in Central and Eastern Europe. It is not surprising, therefore, that we have seen a trend away from the country-specific fund model in what many institutions would consider “emerging” markets.

Of course there are number of considerations that go beyond those mentioned above in deciding the geographical scope of a fund. Having personnel on the ground and the ability to source proprietary deals are much sought-after qualities for a GP. This does not sit easily with a wide geographic remit, which can be expensive to establish and maintain. Similarly, an LP with significant exposure to the asset class will seek to manage country risk at a portfolio level through geographic diversification.

Any way one looks at it, political risk has moved up the agenda in the minds of LPs and GPs alike. A number of regions and a number of private equity ‘hotspots’ have experienced shifts – both in reality and in perception. The industry will no doubt adapt, and those with a wide regional remit will likely find those opportunities necessary to succeed in these changing times.

Ted Cominos, Partner, Edwards Wildman Palmer

This Article was originally published in the Special Year-End Issue of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

When looking at the legal services market in CEE during 2014, one should take into account the expectations and anticipations raised in late 2013, when the bitter experience of previous years had moderated optimism about the economy and prospects for investment growth in the region. As a result, at the dawn of 2015, it seems that the prudent approach adopted by investors and traditional businesses represent substantial steps towards stability and sustainable growth for the near future.

Prices and costs incurred over the years before the global economic crisis were – and some would argue they continue to be – steep and unduly high. However, a long-term assessment, considering the situation before 2008 and throughout 2014, would point towards a rationalization of values that will govern and regulate the building-up of a saner and sustainable market.

Multinational corporations are increasingly viewing CEE as a single regional business area where obstacles for economic growth are gradually being lifted. This shift in perspective comes from the harmonization of laws following accession or candidacy to the EU and aligns with the need to decrease the corruption rate and increase respect for the rule of law.

Greece claims a leading role in the region, by linking its geographical embeddedness with its role as a strategic transport node, thus securing a strong comparative advantage towards neighboring countries. The recent unfavorable economic conditions and challenging political climate, as well as the lack of institution-level stability, have only temporarily affected the country’s potential, as it remains a focal point for foreign investors.

Following a dark period of economic stagnation and fading volatility, foreign investors are now showing renewed interest in Greece, albeit mostly related to yield investments, rather than greenfield projects. This short-to-medium-term investment preference comes about as an attempt to reduce exposure to a fickle administrative and regulatory framework that may lead to increasing levels of confusion and uncertainty for foreign investors, who seek investment returns much higher than what a country like Greece should justify (being a mature economy, old EU member, etc.)

The massive reforms implemented – mainly as a result of Troika’s involvement – at both the legislative and administrative levels, all geared towards transparency and the creation of an investment-friendly environment, have already started to produce the desired effect of luring investment – a trend that is expected to grow even more in 2015, mainly in the areas of tourism, energy, and real estate.

Romania, an EU and NATO member with a population of over 20 million, is gradually evolving into an engine of considerable international business activities in the region and emerging as a greenfield project itself: green energy and real estate were noted as top investments in the region, strongly encouraged by legislators and providing investors a field day.

For example, governmental incentives with respect to energy produced in wind farms or PV parks have triggered chain investments and contributed to the decrease of electric power consumption.

At a time when the real estate market for housing and office buildings has stabilized, mortgage loans have tripled credit scores, and spin offs or acquisitions keep luring investors, the law regarding the purchase of agricultural lands by non-Romanian EU citizens is finally setting ground rules that were expected seven years ago, following Romania’s entry into the EU. This renders Romania, Europe’s so-called granary, a top destination for investors across Europe.

Moreover, certain more general legislative measures, such as the newly amended and introduced criminal and criminal procedure codes, will frame an entirely fresh scheme in protecting legitimate businesses and achieving a fortified investment and development environment in Romania.

Albania is the least developed of the countries where Drakopoulos has offices, a fact that brings out challenges as much as opportunities. The recent change in that country’s government resulted in a grave disruption in economic activity, with most large scale projects put on hold – but at the same time it signaled the will to “tidy up” the market, to level the playing field, strengthen the rule of law, and ensure that the public administration and judiciary adopt a more effective and equitable stance for all investors.

In the same spirit of “tiding things up”, public spending in Albania was also severely trimmed in 2014, with very few large-scale projects related to infrastructure or major reforms going forward.

Many therefore expect that 2015 will be the year they will begin reaping the benefits of the new Albanian government’s conservative approach during the previous year, with investment being revived in areas such as energy, tourism, and infrastructure.

In light of the above, the key point is to promote CEE not as a reflection of regional variations but as one geographical region presenting top investment opportunities in the right areas. And newly introduced legislative amendments, boosted by the powerful presence of Asian investors in many countries of Central East Europe, can only point to CEE as one of the top and most interesting and challenging markets for investors that are keen to diversify and, importantly, exploit the investment potential of the region.

Adrian Roseti, Partner, Drakopoulos Law Firm

This Article was originally published in the Special Year-End Issue of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.