After losing West’s trust, ag firms looking to China

German bonds may be trading at near zero interest, but for almost everyone else the cost of capital is at its steepest in years, reflecting global markets' growing aversion to risk.

Ukrainian agribusiness companies that have in past years raised badly needed capital in Poland will likely face an even tougher market. One reason is that shoddy accounting by Warsaw Stock Exchange-listed companies has shaken investor trust.

But on the flip side, China is eyeing the local market, offering an alternative to traditional sources of funding.

Agroton, a major agricultural producer based in eastern Ukraine, has rattled investor confidence in recent months. The company was unable to provide adequate documents for revenues of $66 million and filled its export documentation with mistakes. The lack of documents suggests doubtful origins. This led to a qualified report by its auditor Baker Tilly questioning the veracity of the reports. Agroton has since switched to Big Four auditor KPMG. The company's stock price fell in astonishing 63 percent since the beginning of April.

While Agroton's accounting shenanigans stand out as the most serious violations, other companies have also done some damage to their reputations. A recent article by the Polish business daily Parkiet blamed the unreliable nature of several issuers for the poor performance of the WIG-Ukraine Index, which covers the 10 Ukraine-lased companies (mostly agribusiness) listed on the Warsaw Stock Exchange.

The index fell a whopping 23 percent over the past month, representing a fall of 16 percent since the beginning of the year.

The article highlighted that Ukrainian companies have repeatedlymade ambitious promises, but then failed to deliver, citing sunflower producing giant Kernel's recent results as an example. Further worries arose after KSG Agro, a major crop producer out of Dnipropetrovsk Oblast, failed to disclose audited results altogether, blaming problems with its auditor.

Problems with communication on behalf of Ukrainian managers means that even the diligent and reliable companies get thrown into the same bag. However, in some cases Polish investors needed to distinguish better between solid reliable companies and "junk," particularly some of the newer companies on the exchange. A lesson for Polish investors - do not buy everything that someone offers you, even if you know that broker.

Unfortunately, if a new company plans to list in Warsaw fund managers will look at it through the prism of past negative experience.

These cases should be taken seriously. Institutional investors, in particular, attach a great deal of importance to timely and transparent reporting, and the trust has clearly been shaken.

It was not a spark but a torch that led to the Parkiet article. Those companies that wish to stand out in investors eye's shouldn't make unrealistic promises but rather keep their standards high, reporting with regularity and consistency, They should take on a more proactive approach. This means being open to communication with retail investors, not just analysts from major institutional buyers, as well as a more accessible and customer-oriented attitude. This would reassure not only retail buyers, but also the institutional ones.