Etc Sme Local Currency (Lcy) Programme Technical Cooperation Framework

OFFICIAL USE

TERMs OF REFERENCE

ETC SME LOCAL CURRENCY (LCY) PROGRAMME TECHNICAL COOPERATION FRAMEWORK

Armenia: Workshop on Capital Markets Instruments for SME Finance Consultants

1. BACKGROUND

The European Bank for Reconstruction and Development (‘EBRD’ or the ‘Bank’)promotes economic transition, by both achieving enterprise change in viable small and medium enterprises (‘SME’ or ‘SMEs’) and developing sustainable infrastructures of local business advisory services in the countries of operations of the EBRD.

The Early Transition Countries (ETCs) SME Local Currency Programme Technical Cooperation (TC) Framework (the Framework) is being implemented by the EBRD within its key Local Currency and Capital Markets Development (LC2) Initiative and funded by the Japan-EBRD Cooperation Fund. The Framework supports necessary capital market reforms to (i) make ETCs more resilient, (ii) develop access to alternative sources in local currency for the domestic market participants, and (iii) facilitate local currency funding by the EBRD and others in ETCs under the EBRD’s SME Local CurrencyProgramme (LCYP).

Globally, according to the Organisation for Economic Co-operation and Development, SMEs represent the dominant form of business organizations, accounting for over 95% and up to 98% of enterprises, depending on the country. Especially in emerging economies, SMEs are the driving force behind economic growth, job creation, poverty alleviation and wealth creation. Yet, in terms of financing vast majority of SMEs tends to rely on bank lending. However, the global financial crisis has indicated that there is a need for a diversification of funding sources and not overlying on bank financing. The European Union has noted this, and started establishing the Capital Market Union, to mobilise funds via the financial markets.

In more developed countries, SMEs can in addition to or instead of traditional bank lending finance themselves by issuing equity and debt securities in the capital market. For this to transpose in transition economies, it is essential that relevant stakeholders work together to overcome weaknesses and develop capital market based mechanisms to support SMEs. It is important to understand possible solutions and ways to have access to finance for SMEs, as well as bridge the knowledge gap and reduce illiteracy in the area of capital markets development and its financial instruments.

Access to finance in Armenia is one of the major concerns for SME growth. The banks are the major players of the market while private equity activities are very limited. However, at the same time there are number of companies with large potential for growth, who are unable to attract financing from traditional sources of finance.The EBRD in Armenia provides both finance and know-how to SMEs for potential access to finance. In terms of finance, EBRD finds that the SME sector is constrained specifically by lack of equity and that the development of an active capital market is crucial for ensuring further growth and development of local SMEs. At the same time, EBRD experience with local clients has shown that they are often insufficiently prepared to present themselves to potential investors. In this regard, EBRD believes that businesses need professional know-how to better present themselves and engage with investors to grow and stay competitive.

Armenian capital market is nascent and still requires development. There are not many activities in the sphere of debt and equity financing. It is however important that the Armenian businesses have increased understanding of the capital market as a funding source, what are the requirements, tools, ways, risks and rewards.

In a continuing effort to contribute to the development of a sustainable infrastructure of local business advisory services, Advice for Small Businesses(ASB) Armenia team, in collaboration with SME LCY Programme Framework[1], seeks to improve enterprise performance through a tailor-made course on Capital Markets Instruments for SME Finance Consultants delivered by an international expert to local consultants.

1. OBJECTIVE

The main objective of the Assignmentis to provide the Armenian finance consultants (that cooperate with local SMEs on almost daily basis) with a focused training in the area of capital market development, improving quality of business advice regarding preparation of SMEs for various stages of financial investment and increaseshareholder value, pertaining to best international practices, and addressing topical issues relevant to SME debt and equity instruments in the capital markets. It is envisaged that such consultants will then transmit acquired knowledge to their SME clients which will help to increase the awareness about the topic and provide necessary skills.

1. SCOPE OF SERVICES

In order to achieve the objective of the Assignment, the Consultant, in coordination with the EBRD, will prepare and conduct a workshop, which will feature discussions and presentationsand reflect current industry trends and international best practices. The workshop will be devoted and specifically designed for consulting companies and individual consultants, who will be using these new skills in their projects with the SMEs in Armenia.

In particular, the Consultantwill be required to carry out the following activities:

Activity 1: Design the necessary capacity building curricula;

Activity 2: Design the necessary presentation and distribution materials;

Activity 3: Conduct a tree-dayworkshop in Yerevan, Armenia.

Activity 1: Design the necessary capacity building curriculum for workshop participants

The Consultant will design the structure ofaworkshop as well as necessary capacity-building curricula. The deliverable of the Activity 1 will be fully developed and comprehensive Curricula. It is up to the Consultantto propose the design and content of the courses, however, at minimum the topics outlined below should be covered.

Workshop: Capital market debt and equity instruments, including business valuation courseis a three-day workshop and will cover the following topics

-Definition of capital markets;

-Valuable macro-economic and micro-economic effects of developed capital markets;

-Capital market financial instruments - difference from the classical form of financing;

-Capital market financing, its demand and supply, including internal and external sources of financing;

-Types and processes of common financing stages including, but not limited to: (i) seed financing, (ii) start-up financing, (iii) initial growth financing, (iv) growth financing, (v) mezzanine/bridge financing; (vii) initial public offering.

-Who, what and how, the pros and cons:

Strategic and financial investors/investments;

Business angles investments;

Venture capital investors/investments;

-Types and processes of capital market debt instruments, e.g.: (i) bank loan, (ii) commercial paper, (iii) project finance, (iv) corporate bond;

-Types andprocesses of capital market equity instruments, e.g.: (i) private equity placement, (ii) public equity placement;

-Definition of business valuation and the purpose it serves;

-Elements of business valuation: (i) economic conditions, (ii) financial analysis and (iii) normalization of financial statements;

-Business valuation methods, i.e.: (i) discounted, (ii) discounted cash flow, (iii) multiple approach;

-Discounts and premiums, i.e: (i) discount for lack of control; (ii) discount for lack of marketability, such as, but not limited to restricted stock studies, option pricing, and pre-IPO studies;

-Estimates of business value;

-Most common errors in valuations;

-Exit at valuation;

-Initial public offering (IPO):

Reasons to go public and prerequisites;

Management decision and IPO process;

IPO timetable and costs;

Pricing mechanisms;

-Secondary public offering (SPO):

Reasons for SPO and its process;

-Commercial papers/bonds:

Bank bonds: (i) amortising structure, (ii) sinking structure (sinking funds);

Corporate bonds: high yield bonds/junk bonds –detailed covenant structure & collateral;

Bullet bonds;

-Warrants and hedging instruments;

-Decision-making: debt financing or equity financing?

-Case studies & group assignments, as well as practical tools and instruments that the training participants can use in day-to-day work with SMEs;

-Recommendation to participants on further reading.

Activity 2: Design the necessary presentation and distribution materials for workshop participants

Based on the developed curriculum of Activity 1 and keeping in mind the length of the workshop, the Consultant will:

(a)Prepare slides of the workshop, which will be used by the Consultant, and later by the EBRD for follow up workshops with other market participants (Workshop slides, ppt format).

(b)Prepare case studies for interactive discussions and group exercises. Case studies and group assignments will assist the participants in putting presented concepts into practice. Upon necessity, the Consultant should prepare pre-course reading materials and case studies for participants’ preparation.

(c)Design a session with guest speaker(s).

(d)Prepare questions forthe workshop evaluation feedback form.

Activity 3: Conducta three-day workshop in Yerevan, Armenia & Final Report

The Consultant should be available for delivering the workshopagainst the pre-agreed schedule. It is envisaged that the workshop will be from 22-24November2017.

The workshop will feature presentation slides with interactive discussions as well as group exercises.Upon completion of each workshop, the Consultant shall collect the participants’ feedback from the training course and prepare a final report on the Assignment (based on the final report template provided by EBRD ASB team), including an analysis of the outcomes of the training, lessons learned and recommendations for future design and potential replication of the workshops in other EBRD countries of operations.

1. IMPLEMENTATION ARRANGEMENT

1)The Consultant will be contracted by the EBRD and Assignment oversight will be provided by the LC2’s Operation Leader (OL) as well asteam members from theEBRD’s ASB team. The Consultant will report directly to the EBRD and will work closely with the OL. The Consultant will have overall responsibility for delivering the assignment according to the agreed work plan and will, as such, manage the Assignment implementation and actively monitor the progress achieved. The Consultant shall carry out the tasks stated herein through coordination and management provided by the EBRD’s OL and responsible local ASB team member, and any other person explicitly authorised by the OL.

2)The ASB team will nominate a team member who will help with the logistics for the organization of the workshop. EBRD’s ASB team will identify participant profile, number of participants and send out invitations to the target group.The training shall be conducted for up to 20 participants. The main target audience of the workshop are practicing consultants specialised in providing management consulting in the area of attracting financial investments and partner search. A training announcement along with application form will be published in media outlets and spread through EBRD Armenia and IMC Armenia consultants’ databases to ensure maximum outreach. The selection will be made on a competitive basis by an evaluation committee formed from EBRD Armenia team based on consultant's relevant experience and qualifications.

3)The Assignment will take place both in country and off-site, and the Consultant will be required to have the necessary administrative capacity for the implementation of this assignment. The local EBRD team can assist the Consultant with reservation of accommodation and logistics related to workshop delivery.

4)The duration of the Assignment is 3 months.

1. REPORTS AND DELIVERABLES

The Consultant shall deliver all tasks set out in Section 3. Scope of Services of thisTerms of Reference.

All deliverables should be in English and must be satisfactory to the EBRD. The disbursement of payment will be contingent upon all deliverables being satisfied.

• Draft materials should be prepared by 25 October 2017;
• Final materials should be delivered by 8 November 2017.

• All relevant training materials utilised for the training;
• Analysis of the outcomes of the training;
• Participant feedback and evaluation results;
• Recommendation for potential additional trainings and follow-up activities in Armenia.

1. DONOR VISIBILITY

Japan has generously contributed, via the Japan-EBRD Cooperation Fund, to the SME LCY Fund to support Technical Cooperation (TC) programmes in ETCs to deliver the SME LCY Programme. The Consultant will be required to ensure the visibility of the Donor.

Measures could include but are not be limited to:

• All documents produced by the Consultant should mention donor support and bear the logo of the donor, when appropriate;
• Donor support to the project should be acknowledged in any public communication (press releases, launch of facilities);
• Local representatives of donor should be invited to any public event organised to promote the project.

Support on these visibility aspects can be obtained from the Bank’s Communications Department. Additionally to assure donor visibility local ASB team will organize a press conference during the training days, featuring the training as well as donor engagement within the topic.

1. OUTCOME AND OUTPUT INDICATORS

At the end of the Workshop all participants should be able to:

• understand Armenia capital market development perspective, main players and major operational activities regarding design and implementation of corporate investments;
• critically analyse financial information to assess the risks in a company based in Armenia;
• understand critical differences in debt and equity financing;
• judge whether debt or equity financing, or a mix is the most appropriate investment for the company within the investment climate in Armenia;
• prepare potential SMEs for applying to Private Equity Fund investments in Armenia;
• advise on corporate governance best practice and its benefits;
• justify potential exit routs for equity investments.

The immediate outcome of the Assignment will be:

• At least two new consultants will be qualified in the MIS;
• At least three consultants will report delivering better quality projects;
• At least three consultants will report having used the tools, techniques and skills obtained at the course in consulting projects.

It is expected that the Assignment will:

• increase and deepen consultants understanding of capital markets and existing instruments;
• transfer comprehensive knowledge on debt and equity financing, the detailed structuring of debts and equity financing, potential advantages and disadvantages
• enable participants to analyse potential client companies from both a debt and equity financing perspective, applying modern tools and techniques, and recommend potential financing opportunities in those companies;

• contribute to the development of Armenian capital market;
• contribute to increased potential of the development of robust pipelines for private equity investors and the upcoming Private Equity Fund of the SME FAF.

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OFFICIAL USE

[1]The TC Framework, in support of the SME LCY, is to cover five areas:1)Reforming the legal and regulatory environment to support modern capital market activities, instruments, and infrastructure; 2)Providing capacity building programmes for central banks, market participants and regulators; 3)Developing capital market products by providing a feasibility study, implementation roadmaps, and education on the new or uncommon instruments such as corporate bonds, covered bonds, basic securitizations, repos, basic derivatives (e.g. FX or interest rate swaps), and equity listing support programs for SMEs; 4)Reforming capital market infrastructure, covering exchange, clearing, settlement, and depository entities, as well as, relevant market infrastructure areas of the central bank (e.g. money market systems, government bond trading platforms and registries, and payment and settlement systems); 5)Developing the local and international institutional investor base, including pension funds.