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"Ukraine was the number one place likely to default but now it's in the top ten. So you can see its better," one partner says....

"Ukraine was the number one place likely to default but now it's in the top ten. So you can see its better," one partner says. This somewhat facetious statement communicates an important truth about the Ukrainian market. In the wake of the financial crisis, Ukraine had been subject to escalating levels of sovereign debt. This trend continues as the new government, despite sharply criticising its predecessors, continue to increase state debt. However, owing to reviving investor interest in emerging and frontier markets, Ukraine has been able to, at least for now, borrow more relatively cheaply. Therefore, the conditions which gave rise to the partner's statement above see improvement as a consequence of the lower risk of default relative to a market which cannot yet be described as healthy.

Market commentators agree that the banking sector has been slowly improving with an increased, yet restrained appetite to provide loans. "Banks are in search of stable borrowers. Many are looking at small to mid-sized companies limited to international institutions," one partner says. Nevertheless, for lawyers there are a number of significant projects where the debt has not been restructured yet. "Western banks are in restructuring projects and are not comfortable in providing new loans. So there is no influx of new lending," one partner says, adding: "Russian banks have been more active and provide refinancing and in other cases are ready to provide new money to strategic assets." In general, banks have been more forthcoming to finance small to medium sized enterprises. Retail banking has been fairly quiet and there has been an upturn in trade and export finance while real estate has remained slow. Furthermore, there has been reshuffling in the central bank with the hire of Serhiy Arbuzov as the new central bank chairman on the resignation of Volodymyr Stelmakh.

The local capital markets are quite unstable and unpredictable; nonetheless, there has been activity as market players tend to look further afield. "The capital markets in Ukraine are volatile and not seen as a stable source of income," one partner says, with another adding: "The issuance of shares in Ukraine is not really developed for this. Infrastructure and the regulatory framework are not very supportive and there is not too much demand." The state has been active in the capital markets with the issuance of Rule 144A/Reg S Eurobonds. In fact, the 2011 state budget evinced the intention to raise $4.5 billion through Eurobonds while borrowing $500 million from the World Bank. Yet, the debt capital markets have also been active on the local front and the government is set to issue $6 billion worth of domestic loan bonds. On the equity side, an interesting trend has surfaced. Mainly in the agriculture sector, there has been a spate of IPOs directed towards the regional hub, the Warsaw Stock Exchange. "Their business structures all dream of additional funding but the banking system in Ukraine can't provide this. So, they're looking through different sources," says one partner, with another adding: "The attraction of the Warsaw market is because it is highly liquid and active in Europe. Capital is creating demand. Ukrainian companies have a higher profile in Warsaw and not in London."

Any inclination towards project finance is in the traditional energy sector. "There have been talks of measures and changes in the law to support renewable energy but no significant developments," one partner said. Additionally, the 2012 UEFA European Football Championship is set to be co-hosted by Ukraine; however, there has been little scope for the private sector. This is despite the parliament of Ukraine approving, on July 1 2010, a law to guide public-private partnerships (PPP). "The state waited too long to get the private sector involved (in Euro 2012). They've known for four years now and they didn't enact a PPP law. And when they did, it was not fully adopted, so now this has to be state funded," one partner says. There has also been enhanced focus on infrastructure projects such as ring roads and other highway projects. "The government is not talking of PPPs. They're not opening doors for private investors," one partner says.

Market commentators have observed very little shift in M&A activity over the last twelve months. However, there has been a reserved optimism directed to stability, confidence and increased interest in M&A generally....

Market commentators have observed very little shift in M&A activity over the last twelve months. However, there has been a reserved optimism directed to stability, confidence and increased interest in M&A generally. Some players have observed a proclivity for "bottom-feeding" among small to mid-sized strategic investors. However, the consequence of "buying in cheap" meant for a flurry of low value deals as the big-tickets remained absent. "I believe M&A and litigation are two main areas because of restructuring. Whoever survived will buy the assets of competitors," says one partner.

Nevertheless, another partner observes: "I think a more notable trend or anti-trend is the lack of strategic investors coming into the market. There is a decent amount of Ukrainian to Ukrainian and Ukrainian to Russian activity. A lot of these deals get done on the back of a napkin so there are a lot of transactions," one partner says. In truth, the similar culture, history and legal systems of Russian and Ukrainian players enables deals to move faster as due diligence is accomplished more easily. "Ukraine is not totally aligned with Russia. Because of the old Soviet days, Russia understands the system here and doesn't care for due diligence. It works informally, through families. They don't need the Western style, they are the closest of two countries. But, it's not certain that Russia are benefiting from this. Ukraine negotiates with Europe and Russia. They say nice things to Russia to placate them because of gas and they deal with Europe too," one partner says.

Agriculture has been big news in the last twelve months. "It's a very big flavour of the month now and for the next couple of years. Last year, most activity was mainly through IPOs in Warsaw," says one partner, adding: "It's pretty acquisitive and consolidates holdings in Ukrainian to Ukrainian deals". "We see the consolidation of the market. Large players become larger. They compare themselves to the largest agriculture players in Argentina. They are active in the acquisition of companies to have as much as possible," says another partner.

The pharmaceutical industry has proved to be extremely profitable as a sector despite facing difficulties on the regulatory side and not having too much M&A activity of late. "There's uncertainty with the law. We're expecting a raft of new laws. It will have an impact on IP rights...watch and see," one partner says.

There is not a lot of competition or transparency in the telecommunications sector as power is concentrated within the hands of a few players. Significantly, the last year has seen the privatisation of Ukraine's largest fixed communications operator. Austria's EPIC recently transmitted close to €1 billion to Ukraine's State Property Fund as payment for a 92.79% stake in Ukrtelecom.

The focus of energy has very much been on the traditional variety with much discussion on the future of the sector, taking place on political platforms. There has been discussion on the modernisation of gas transportation and also the possibility of a merger between Naftogaz and Gazprom, engaging in a joint venture. Optimists state a case for renewable energy but that is very much on the backburner. "In energy, there has been a good shift. There is interest in green tariff, wind, solar and biomass on a lesser scale. There is more in the future in Ukraine," says one partner, with another adding: "There is some foreign investment. There are wind possibilities, wind farms in southern Ukraine along the coastal regions of the Black Sea. With other green energy like bio fuels, there are no adequate laws". Recently, the French company Filasa International expressed its desire to construct wind energy plants of 1.6GW in Ukraine by 2016.

Furthermore, the market has seen activity from private equity funds as regional players, Horizon Capital, and global players, Advent International, have kept law firms busy. "We've seen private equity funds come into Ukraine. This has not been seen since 2007," one partner says.

It remains to be seen, however, whether the introduction of the new tax code, the abolishment of a number of licensing requirements and the expiration of the transition period for joint stock companies to adapt to the requirements of the 2009 Joint Stock Companies Act will play a crucial role in the advancement of the M&A market in the near future.