OREANDA-NEWS. July 20, 2009. As part of its crisis-response strategy in Ukraine, the EBRD agreed to buy a stake worth US50 million in OJSC Galnaftogaz, which operates the OKKO chain of petrol stations, one of the country’s market leaders. EBRD Principal Banker Matteo Colangeli from the Natural Resources team describes how the deal – the EBRD’s third with Galnaftogaz – will help the company to not only survive but also thrive, reported the press-centre of EBRD.

How much impact has the financial crisis had on Galnaftogaz?

From an operational point of view, Galnaftogaz has continued to do well despite the difficult economic situation in Ukraine, growing its network of stations while continuing to generate strong margins. However, the company has sizeable dollar-denominated debt and has been affected significantly by the devaluation of the hryvnia. This has put pressure on the company’s ability to stay within financial covenants on its existing loan facilities and has severely affected its liquidity.

This equity transaction is designed to support a long-standing EBRD client – we have previously done two debt projects with Galnaftogaz – through the financial crisis. As well as ensuring that the company has enough financial flexibility to cope with the currency devaluation, the deal should enable them to capitalise on any opportunities to selectively expand the business which might arise in the coming years and to continue investing in improving the quality and efficiency of their operations.

The project also has environmental and corporate governance components. What are they?

Galnaftogaz has a strong track record of implementing high environmental and safety standards and has already started introducing measures to reduce the energy cost of running its operations. The EBRD's Energy Efficiency and Climate Change team has been working with the company over the last few months to complete an energy audit and identify further investments needed to improve energy efficiency. These investments will be financed using the proceeds from the EBRD’s equity contribution.

As part of the project, the company has also pledged to implement a corporate governance plan which was developed with the EBRD's input and which would put it at the forefront of Ukrainian corporates in terms of transparency. This will include the appointment of independent directors and the creation of an audit and compliance committee where independent directors and the EBRD nominee will form a majority. These improvements in corporate governance will help Galnaftogaz move closer to meeting the standards required for listing on a major international stock exchange.

How big a player is Galnaftogaz in the Ukrainian petrol station sector and what are the prospects for expansion?

Galnaftogaz has about 7 per cent of the Ukrainian market by volume of fuel sold, which puts it among the three top players in a very fragmented industry where the nine largest retailers control just over half of all petrol stations in the country. The rest is made up of small networks or single chain operators.

This creates plenty of opportunity for consolidation, especially in the current economic climate when many less successful operators might be forced to sell. For a company with enough cash available to move quickly, this could be a great opportunity.