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The European Bank for Reconstruction and Development (EBRD) is noteworthy as the only international financial institution located in London’s sprawling international financial centre. The EBRD is a multilateral financial institution (owned by sovereign states and organisations), which supports, mainly through the financing of projects, the transition of post-communist countries to market economies.

Established in 1991, the Bank has its headquarters in London and is owned by 62 members — 60 countries, the European Community and the European Investment Bank. Twenty-seven member countries are the Bank’s so called “countries of operations”, i.e. recipients of EBRD funds. The EBRD is one of the biggest players in project and corporate finance in the region. In 2003, the Bank committed EUR 3.7 billion to 119 projects in all countries of operations. The Bank’s cumulative business volume (all loans, equity and guarantees) over 13 years of its existence is close to EUR 23 billion, which, together with mobilized third party financing, amounts to total project value of almost EUR 70 billion.

What does the EBRD do?

The Bank finances projects in countries from Central Europe to Central Asia: in Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Former Yugoslav Republic of Macedonia, Georgia, Hungary, Kazakhstan, Kyrgyz Republic, Latvia, Lithuania, Moldova, Poland, Romania, Russia, Serbia and Montenegro, Slovak Republic, Slovenia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan.

Thanks to its AAA rating, the EBRD is able to borrow funds in the international markets by issuing bonds and other debt instruments at highly cost-effective market rates, and thus to provide loans tailored to the requirements of its clients. The Bank provides mainly loans and equity to various projects in various sectors.

But while 70% of its portfolio is in the private sector, 30% is still focused on public services, i.e. improvement of transportation, infrastructure, municipal utilities etc. By participating in a project, the Bank makes a risky project in a risky country or region more attractive to outside investors. Also, by attracting third party financiers, the Bank spreads the risk and multiplies its cumulative financing effect. For each dollar of the EBRD’s own participation, it often mobilises three dollars from other financiers and investors. The Bank also improves access to loans for projects of all sizes, including micro— and small business, in practically all sectors. The EBRD, as an international financial institution, insists on strict environmental standards (it is rightly called a “green bank”), improved corporate governance and stringent anti-corruption measures. It promotes transparency and accountability to the public, and is pledged to improve the business climate in all of its countries of operations. Plus, the Bank has a unique political mandate — its shareholders believe that market economy goes hand-in-hand with pluralistic democracy. So if a country has a poor democratic record, the Bank only carries out very limited operations there.

Sectors supported by the EBRD are: agribusiness, energy efficiency, financial institutions, manufacturing, municipal and environmental infrastructure, natural resources, power and energy, property and tourism, telecommunications, information technology and media, and transport.

Dealing with the EBRD

The Bank’s headquarters are easy to find — One Exchange Square, London (just a few minutes walk from Liverpool Street station or just behind Botero’s famous reclining beauty). The Bank also has offices in 33 countries where experienced bankers, both local and expatriate, can provide advice and feedback on your project proposals. However, before you decide to go to London or knock on the door of one of the EBRD’s local offices, do your homework. The EBRD is NOT an easy institution to deal with. It puts forward quite a few project-related conditions and requirements, which your business has to satisfy before a project commitment can be made. And the Bank is quite serious about these requirements. So, check whether your project stands a chance.

Each potential EBRD project should:

▼ Be located in one of the Bank’s countries of operations.

▼ Have strong commercial prospects (be bankable).

▼ Involve significant equity contributions in-cash or in-kind from the project sponsor(s).

▼ Benefit the domestic economy or address regional cooperation / trade.

Meet EBRD sound banking, corporate governance and environmental standards. EBRD financing for private sector projects generally starts from EUR 5 million, which may be in the form of a loan or equity participation. The minimum financing requirement also means that the sponsor’s own participation in the project should be at least Euro 5 million, with the rest being mobilised from third parties. The average size of EBRD standalone financing is EUR 25 million.

However, smaller projects may be financed through financial intermediaries or through special programmes for smaller direct investments, which benefit from the EBRD financial support. This is particularly important in smaller countries. Financial guarantees may also be provided, but their share in the Bank’s total business is small.

Project Structure

The EBRD typically funds up to 35 percent of the total project cost for a Greenfield project or 35 per cent of the long-term capitalisation of the project company. You should expect that the Bank will require a significant equity contribution from the project sponsor(s), at least equal or greater than the EBRD’s financing. For the rest of project financial requirements, there must be additional funding from the project sponsors or other co-financiers, which could be generated through the EBRD’s syndications programme.

Project Cycle Duration

The EBRD is not the fastest solution to your immediate financial needs. But sometimes it may turn out to be the only one, especially if long-term projects are concerned. Having the EBRD on board is like having a quality stamp on your business, which may open other doors. The better your project proposal is prepared, the faster the EBRD bankers can move. A deal typically takes three to six months from initiation to signing the project documents. But it may take longer. You should be patient.

Perhaps, during the process, you will secure financing from market sources. That is not a problem — the EBRD is not supposed to provide financing for projects which the market will finance on comparable terms.

Types of Funding Available

Loans: EBRD loans are structured with a high degree of flexibility to match client and project needs. These loans include following basic features:

▼ EUR 5 million minimum (less in some smaller countries).

▼ A fixed or floating interest rate.

▼ Senior, subordinated, mezzanine or convertible debt. Loan denominated in major foreign or selected local currencies.

▼ Short and medium to long-term maturities — from 1 year (for working capital or trade finance) to 5-7 years (for average capital expenditure and modernization projects) or to 10-15 years (for sovereign infrastructure projects).

▼ Project-specific grace periods, where necessary, may be available.

Equity: The EBRD can take equity positions in companies and financial institutions, which might range in size from EUR 2 to 100 million. Equity is only provided, however, on a number of conditions: that there is an expected appropriate return on investment; that a position is a minority stake; and only if a project envisages a clear exit strategy for the Bank. The exit should normally be within four to eight years of the initial investment, varying from project to project. The Bank’s exit strategy typically involves a sale to the project sponsors, a strategic investor(s) or via IPO.

Guarantees: The Bank can provide several types of guarantees, which range from all risk ones (to cover lenders against default regardless of the cause) to partial risk specific contingent guarantees (to cover against specified events). In all cases, the maximum exposure must be known and measurable and the credit risk must be acceptable. Precise legal definitions of the events guaranteed and pricing are considered on a case-by-case basis.

Small- and Medium-Sized Projects

For projects smaller than EUR 5 million for the Bank to finance, the EBRD extends, practically in all countries of operations, credit facilities to local financial intermediaries (commercial banks, specialist micro and small business banks, equity funds and leasing companies). These intermediaries then provide smaller loans to micro, small and medium-sized businesses. The financing requirements are similar to the Bank’s general approach but financial intermediaries make independent decisions about which micro, small and medium-sized enterprises they support. For these types of financing, it is advisable to find out from local EBRD offices in each country which financial institutions work with the EBRD credit lines and obtain necessary documentation for applications.

In addition, the EBRD also provides to small- and medium-sized projects other financing, including:

Equity financing: Equity is available from EBRD-supported private equity funds, donor-supported equity funds and directly from the Bank. Equity funds support all kinds of investments, including business start-ups, expansion and acquisitions. EBRD direct investment: Equity finance of up to EUR 2.5 million for businesses led by experienced entrepreneurs is available directly from the EBRD through the EBRD Direct Investment Facility (DIF). The EBRD’s DIF is targeted at smaller businesses based in many countries and regions including the Caucasus, Central Asia, South-Eastern Europe, Belarus, Moldova, Ukraine and parts of Russia.

Trade finance

The Trade Facilitation Programme (TFP) supports foreign trade in the Bank’s countries of operations. Through the programme, the Bank covers the political and commercial payment risk of transactions undertaken by participating banks. The programme can guarantee any trade transaction associated with exports from, and imports to the Bank’s countries of operations. Specifically, the EBRD provides guarantees to international commercial banks (confirming banks) to secure payment of instruments issued by participating banks (issuing banks). Around 80 issuing banks in the EBRD region participate in the programme together with about 490 confirming banks throughout the world.

Business Development Programmes

The EBRD supports several business development programmes that raise the level of management and financial expertise in the Bank’s countries of operations:

▼ The TurnAround Management (TAM) Programme, which enhances the knowledge, confidence and capabilities of senior management in industrial companies;

▼ The Business Advisory Services (BAS) Programme, which targets local consultants assisting small and medium-sized enterprises (SMEs) on business performance.

YURI POLUNEEV, EBRD — Yuri Poluneev is Director, Ukraine / Romania / Moldova / Georgia / Armenia within the EBRD.