“We offer agribusiness our investment tools”

24.01.2010 | 18:01 Home / News / Articles /

Interview of Executive Director of Fund for Rural Economic Development in Armenia (FREDA) Tigran Khanikyan to Mediamax Agency and Banks.am portal

- What was the goal of Fund establishment and what results did it register in the first months of its activity?

- Establishment of the Fund was the joint initiative of the Armenian government and the International fund for Agricultural Development (IFAD). The decision of the government on setting up the Fund was made on January 8, 2009, and the factual activity of the structure was launched in September, 2009. The supreme management body of the Fund is the Board of Trustees under the chairmanship of the Armenian Prime Minister. 

The Fund is meant to assist agribusiness spheres, which contribute to development of rural areas in Armenia. The target segments for FREDA’s assistance are: agricultural products processing, milk and dairy products processing, winemaking and fish breeding. Our task is to find agribusinesses, which function in the above-mentioned spheres and offer them our investment tools. 

The Fund acquires participation in the capital of companies by means of additional issue of ordinary or preferred shares, and, as a shareholder, may provide enterprises with short-term subordinated loans for the operating capital.

In late, 2009, the first stock investment of FREDA was realized. The agreement on signing for the shares was concluded with “Akvatekhavtomatika” CJSC, the basic activity of which is fish breeding. The investment was realized to expand production facilities of the enterprise.

- Can you describe the process of establishing partnership relations between the Fund and companies?

- Let’s suppose, an entity turns to us and wants to expand its business. The Fund carries out assessment of the company’s own capital with application of international practice, and Dutch IFU organization renders us support in this issue. By the way, FREDA was established just basing on the pattern of analogous structures of Scandinavian countries, which possess many years’ experience of efficient work. In particular, Dutch IFU has been functioning since 1960ss.

If the company meets the requirements we have established, the Fund takes part in its capital for the term of 7 years and assists its development. The Fund gives the company additional means by means of an additional issue of stocks, forms a corporate management system at the enterprise, carries out its accounting in accordance with international standards, assists the company in other operating procedures, helps it implement technologies, required for product export to European countries, etc.

Assistance to enterprises, which function in the sphere of agribusiness, indirectly contributes to increase of farmers’ well-being. They will have concrete idea on the directions, in which they can sell their products. 

Thus, here a chain of values is created, which consists of the following links: production-processing-export of agricultural products. And our mission is to invest in development of this chain, thus, contributing to reduction of the level of poverty.

The negotiation process with companies, which want to use our resources, usually lasts for 3 months, depending on the level of its development. Everything depends on the readiness of enterprises to disclose their financial flows. If the company carries out accurate accounting, it will be easier for it to cooperate with us.

- Which are FREDA’s requirements for companies, which want to use the tool of capital funding?

- First of all, the company should be in our target group. The investment offer, presented by the company, should be realizable, expedient and should contribute to development of the above-mentioned chain of values.

The company should present to us the entire accounting and all contracts for the past 3 years, documents, evidencing ownership for the assets, credit history, as well as present their expectations from the results of our assistance.

There are no requirements of obligatory audit and accounting in accordance with international standards set for companies, although the given factors can only benefit the entity. 

The agreement, signed between the Fund and the company, provides for the term, for which FREDA enters the capital of the enterprise. Upon completion of the term, we sell our share to the entity basing on the principle of preference.  

The Fund enters the capital of companies for the term of up to 7 years. At that, the enterprise may use the right for “call” option and buy its share back ahead of time. We also maintain the right to apply the “put” option and to come out of the company’s capital ahead of time.

If the Fund enters the capital of the company by means of purchasing ordinary stocks, the maximum volume of our share participation can make 45%, but not more than 200mln AMD. If those are preferred stocks, it will make maximum 25%, but no more than 100mln AMD. We have not fixed the limit volume for subordinated loans we provide to companies, but, in fact, they cannot exceed the volume of our initial investment into its capital.

- What capital was used to establish the Fund and who is its funding source?

- Loan means of IFAD are our funding source. FREDA was established with the capital of over $5mln or about 2bln AMD. The Fund has the opportunity to attract new means from institutional investors, but first of all we should successfully place the already existing means and prove that this initiative was successful.

- There are a few banks and credit organizations actively functioning in the sphere of agriculture funding in Armenia. Which are the relative advantages of FREDA?

- In order to receive a loan, the company should have a pawn, the cost of which should exceed the sum of the loan to be received. In our case, there is no process of pawning, but assessment of assets is carried out. We assess the cost of net assets of the given company and the ability of the existing assets to generate financial flows in future. As a result of comparing the two named components, we define the cost of the given business. 

The lending process does not require such an approach: here one should have a pawn and already existing financial flows, sufficient to maintain the loan. We, however, form a clear idea on the current and future financial flows of the company, which will be formed as a result of our participation in its capital. Financing by the Fund is more risky, than a bank loan.

Our advantage is also that there is no issue of monthly payments here. After completion of the fiscal year, the Board of Directors of the enterprise makes a decision on paying dividends or carrying out refinancing.

The tool of participation in the capital is more flexible, than a loan. By the way, capital funding is realized in AMD.

- How many applications by companies are being considered by the Fund now?

- At the moment, we work over 5 new investment projects. We have also held meetings with representatives of over 100 enterprises and presented to them the tool of capital funding. 

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