Hrvatska banka za obnovu i razvitak

Transcription

1 Hrvatska banka za obnovu i razvitak (The Croatian Bank for Reconstruction and Development, a statutory entity established under the Law on Hrvatska banka za obnovu i razvitak (The Croatian Bank for Reconstruction and Development) published in the official gazette of the Republic of Croatia (Narodne novine) No. 138/06) 250,000,000 5 per cent. Guaranteed Notes due 2017 having the benefit of a statutory guarantee from THE REPUBLIC OF CROATIA The issue price of the 250,000,000 5 per cent. Guaranteed Notes due 2017 (the Notes ) of Hrvatska banka za obnovu i razvitak (The Croatian Bank for Reconstruction and Development), (the Issuer or HBOR ) is per cent. of their principal amount. Unless previously redeemed or cancelled, the Notes will be redeemed on 14 June The Notes are subject to redemption in whole at their principal amount at the option of the Issuer at any time in the event of certain changes affecting taxation in The Republic of Croatia. See Terms and Conditions of the Notes - Redemption and Purchase. The Notes will bear interest from 14 June at the rate of 5 per cent. per annum payable annually in arrear on 14 June each year commencing on 14 June Payments on the Notes will be made in euro without deduction for or on account of taxes imposed or levied by The Republic of Croatia to the extent described under Terms and Conditions of the Notes Taxation. The Republic of Croatia (the Guarantor, the Republic or Croatia ) will unconditionally, irrevocably and on first demand guarantee the due and punctual payment of all amounts at any time becoming due and payable in respect of the Notes pursuant to Article 8, paragraphs 2 and 3 of the Law on Hrvatska banka za obnovu i razvitak (The Croatian Bank for Reconstruction and Development), published in the official gazette of the Republic of Croatia (Narodne novine) (the Official Gazette ) No. 138/06 (the HBOR Law ) (the Guarantee ). This Prospectus has been approved by the Luxembourg Commission de Surveillance du Secteur Financier (the CSSF ), which is the Luxembourg competent authority for the purpose of Directive 2003/71/EC (the Prospectus Directive ) as a Prospectus. Application has been made for the Notes to be admitted to listing on the official list and trading on the Luxembourg Stock Exchange s regulated market. See Risk Factors for a discussion of certain factors that should be considered in connection with an investment in the Notes. The Notes have not been, and will not be, registered under the United States Securities Act of 1933, as amended (the Securities Act ) and are subject to United States tax law requirements. The Notes are being offered outside the United States by the Managers (as defined in Subscription and Sale ) in accordance with Regulation S under the Securities Act ( Regulation S ), and may not be offered, sold or delivered within the United States or to, or for the account or benefit of, U.S. persons except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. The Notes will be in bearer form and in the denominations of 50,000 and, for so long as the Notes are represented by a Global Note (as defined below) and Euroclear Bank S.A./N.V. ( Euroclear ) and Clearstream Banking, société anonyme, Luxembourg ( Clearstream, Luxembourg ) (or other relevant clearing system) allow, in denominations of 1,000 in excess of 50,000, up to and including 99,000. The Notes will initially be in the form of a temporary global note (the Temporary Global Note ), without interest coupons, which will be deposited on or around 14 June 2007 (the Closing Date ) with a common depositary for Euroclear and Clearstream, Luxembourg. The Temporary Global Note will be exchangeable, in whole or in part, for interests in a permanent global note (the Permanent Global Note, and together with the Temporary Global Note, each a Global Note ), without interest coupons, not earlier than 40 days after the Closing Date upon certification as to non-u.s. beneficial ownership. Interest payments in respect of the Notes cannot be collected without such certification of non-u.s. beneficial ownership. The Permanent Global Note will be exchangeable in certain limited circumstances in whole, but not in part, for Notes in definitive form in principal amounts equal to 50,000 and integral multiples of 1,000 in excess thereof, up to and including 99,000, each with interest coupons attached. No Notes in definitive form will be issued with a denomination above 99,000. See Summary of Provisions Relating to the Notes in Global Form. DEUTSCHE BANK Dexia Capital Markets EFG Eurobank Ergasias Lead Managers Co Managers 12 June 2007 UBS INVESTMENT BANK DZ BANK AG Hypo Group Alpe Adria

2 Level: 6 From: 6 Monday, June 11, :46 am g5mac Intro : 3738 Intro IMPORTANT NOTICES Each of the Issuer and the Guarantor (whose registered offices are set out on the back page of this Prospectus) accepts responsibility for the information contained in this Prospectus. The Issuer and the Guarantor declare that, having taken all reasonable care to ensure that such is the case, the information contained in this Prospectus is, to the best of their knowledge, in accordance with the facts and contains no omission likely to affect its import. Information contained in this Prospectus under the headings Hrvatska banka za obnovu i razvitak (The Croatian Bank for Reconstruction and Development) and Overview of the Republic of Croatia relating to various statistics was derived from the sources stated (including the Croatian National Bank, the Ministry of Finance, the Croatian Bureau of Statistics and the International Monetary Fund). Neither the Issuer nor the Guarantor accepts any responsibility for the accuracy of such information, nor have the Issuer or the Guarantor independently verified any such information. The Issuer and the Guarantor confirm that this information has been accurately reproduced, and so far as the Issuer and the Guarantor are aware and are able to ascertain from information available from such sources, no facts have been omitted which would render the reproduced information inaccurate or misleading. Each of the Issuer and the Guarantor has confirmed to the Managers named under Subscription and Sale below (the Managers ) that this Prospectus contains all information regarding the Issuer, the Guarantor, Notes and the Guarantee which is (in the context of the issue of the Notes) material (including all information in relation to the Guarantor as is necessary to enable investors to make an informed assessment of the assets and liabilities, financial position, profits and losses, prospects of the Guarantor and of the rights attaching to the Notes); such information is true and accurate in all material respects and is not misleading in any material respect; any opinions, predictions or intentions expressed in this Prospectus on the part of the Issuer or (as the case may be) the Guarantor are honestly held or made and are not misleading in any material respect; this Prospectus does not omit to state any material fact necessary to make such information, opinions, predictions or intentions (in such context) not misleading in any material respect; and all proper enquiries have been made to ascertain and to verify the foregoing. No person has been authorised to give any information or to make any representation not contained in or not consistent with this Prospectus or any other document entered into in relation to the issue of the Notes or any information supplied by the Issuer or the Guarantor or such other information as is in the public domain and, if given or made, such information or representation should not be relied upon as having been authorised by the Issuer, the Guarantor or any Manager. None of the Managers has separately verified the information contained in this Prospectus. Accordingly, no representation or warranty is made or implied by the Managers or any of their respective affiliates, and neither the Managers or any of them nor any of their respective affiliates makes any representation or warranty or accepts any responsibility as to the accuracy or completeness of the information contained in this Prospectus. Each person receiving this Prospectus acknowledges that such person has not relied on any of the Managers in connection with its investigation of the accuracy of such information or its investment decision and each person must rely on its own examination of the Issuer and the Guarantor and the merits and risks involved in investing in the Notes. Neither the delivery of this Prospectus nor the offering, sale or delivery of any Note shall, in any circumstances, create any implication that the information contained in this Prospectus is true subsequent to the date hereof or the date upon which this Prospectus has been most recently amended or supplemented or that there has been no adverse change, or any event reasonably likely to involve any adverse change, in the condition (financial or otherwise) of the Issuer or the Guarantor since the date thereof or, if later, the date upon which this Prospectus has been most recently amended or supplemented or that any other information supplied in connection with the issue of the Notes is correct at any time subsequent to the date on which it is supplied or, if different, the date indicated in the document containing the same. ii

3 Level: 6 From: 6 Monday, June 11, :46 am g5mac Intro : 3738 Intro This Prospectus does not constitute an offer of, or an invitation to subscribe for or purchase, the Notes and should not be considered as a recommendation by the Issuer, the Guarantor, the Managers or any of them that any recipient of this Prospectus should subscribe for or purchase any Notes. The distribution of this Prospectus and the offering, sale and delivery of the Notes in certain jurisdictions may be restricted by law. Persons into whose possession this Prospectus comes are required by the Issuer, the Guarantor and each of the Managers to inform themselves about and to observe any such restrictions. For a description of certain restrictions on offers, sales and deliveries of Notes and on distribution of this Prospectus and other offering material relating to the Notes, see Subscription and Sale. In particular, neither the Notes nor the Guarantee have been or will be registered under the Securities Act and are subject to United States tax law requirements. Subject to certain exceptions, Notes may not be offered, sold or delivered within the United States or to U.S. persons. In this Prospectus, unless otherwise specified, references to HRK and Kuna are to the currency of the Republic of Croatia, references to a Member State are references to a Member State of the European Economic Area and references to EUR, euro or are to the single currency introduced at the start of the third stage of European Economic and Monetary Union pursuant to the Treaty establishing the European Community, as amended, references to U.S. dollar, U.S.D or U.S.$ are to the lawful currency of the United States of America and references to Deutsche Mark or DEM are to the former currency of the Federal Republic of Germany (being a non-decimal denomination of the euro). Certain figures included in this Prospectus have been subject to rounding adjustments; accordingly, figures shown for the same category presented in different tables may vary slightly and figures shown as totals in certain tables may not be an arithmetic aggregation of the figures which precede them. In connection with the issue of the Notes, Deutsche Bank AG, London Branch (the Stabilising Manager (or persons acting on behalf of the Stabilising Manager)) may over allot Notes or effect transactions with a view to supporting the price of the Notes at a level higher than that which might otherwise prevail. However, there is no assurance that the Stabilising Manager (or persons acting on behalf of a Stabilising Manager) will undertake stabilisation action. Any stabilisation action may begin on or after the date on which adequate public disclosure of the terms of the Notes is made and, if begun, may be ended at any time, but it must end no later than the earlier of 30 days after the issue date of the Notes and 60 days after the date of the allotment of the Notes. Any stabilisation action or over-allotment must be conducted by the relevant Stabilising Manager(s) (or person(s) acting on behalf of any Stabilising Manager(s)) in accordance with all applicable laws and rules. iii

4 Level: 6 From: 6 Monday, June 11, :46 am g5mac Intro : 3738 Intro CONTENTS Page RISK FACTORS... 1 OVERVIEW OF THE OFFERING... 7 REPRESENTATION LETTER... 9 TERMS AND CONDITIONS OF THE NOTES SUMMARY OF PROVISIONS RELATING TO THE NOTES IN GLOBAL FORM USE OF PROCEEDS HRVATSKA BANKA ZA OBNOVU I RAZVITAK (THE CROATIAN BANK FOR RECONSTRUCTION AND DEVELOPMENT) OVERVIEW OF THE REPUBLIC OF CROATIA TAXATION SUBSCRIPTION AND SALE GENERAL INFORMATION INDEX TO FINANCIAL STATEMENTS AND AUDITORS REPORTS iv

5 Level: 6 From: 6 Monday, June 11, :46 am g5mac Intro : 3738 Intro RISK FACTORS An investment in the Notes involves certain risks. In addition to the other information in this Prospectus, prospective investors should carefully consider, in light of their own financial circumstances and investment objectives, the following risks before making an investment in the Notes. If any of the following risks actually occur, the market value of the Notes may be adversely affected. In addition, factors which are material for the purpose of assessing the market risks associated with the Notes are also described below. The Issuer and the Guarantor believe that the factors described below represent the principal risks inherent in investing in the Notes, but the Issuer and the Guarantor may be unable to pay interest, principal or other amounts on or in connection with any Notes and/or under the Guarantee, as the case may be, for other reasons and neither the Issuer nor the Guarantor represent that the statements below regarding the risks of holding any Notes are exhaustive. Words and expressions defined in the section headed Terms and Conditions of the Notes shall have the same meanings in this section. Risk Relating To The Notes Notes may not be a suitable investment for all investors Each potential investor in the Notes must determine the suitability of that investment in light of its own circumstances. In particular, each potential investor should: (i) (ii) (iii) (iv) (v) have sufficient knowledge and experience to make a meaningful evaluation of the Notes, the merits and risks of investing in the Notes and the information contained in this Prospectus or any applicable supplement; have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the Notes and the impact such investment will have on its overall investment portfolio; have sufficient financial resources and liquidity to bear all of the risks of an investment in the Notes, including where the currency for principal and interest payments (euro) is different from the potential investor s currency; understand thoroughly the terms of the Notes and be familiar with the behaviour of financial markets in which they participate; and be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks. The Notes may be redeemed prior to maturity In the event that the Issuer or the Guarantor would be obliged to increase the amounts payable in respect of any Notes due to any withholding or deduction for or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by or on behalf of the Republic of Croatia or any political subdivision thereof or any authority therein or thereof having power to tax, the Issuer may redeem all outstanding Notes in accordance with the Conditions. Because the Global Notes are held by or on behalf of Euroclear and Clearstream, Luxembourg, investors will have to rely on their procedures for transfer, payment and communication with the Issuer and/or the Guarantor The Notes will be represented by the Global Notes except in certain limited circumstances described in the Permanent Global Note. The Global Notes will be deposited with a common 1

6 Level: 6 From: 6 Monday, June 11, :46 am g5mac Intro : 3738 Intro depositary for Euroclear and Clearstream, Luxembourg. Except in certain limited circumstances described in the Permanent Global Note, investors will not be entitled to receive definitive Notes. Euroclear and Clearstream, Luxembourg will maintain records of the beneficial interests in the Global Notes. While the Notes are represented by the Global Notes, investors will be able to trade their beneficial interests only through Euroclear and Clearstream, Luxembourg. The Issuer and the Guarantor will discharge their payment obligations under the Notes by making payments to the common depositary for Euroclear and Clearstream, Luxembourg for distribution to their account holders. A holder of a beneficial interest in a Global Note must rely on the procedures of Euroclear and Clearstream, Luxembourg to receive payments under the Notes. The Issuer and the Guarantor have no responsibility or liability for the records relating to, or payments made in respect of, beneficial interests in the Global Notes. Holders of beneficial interests in the Global Notes will not have a direct right to vote in respect of the Notes. Instead, such holders will be permitted to act only to the extent that they are enabled by Euroclear and Clearstream, Luxembourg to appoint appropriate proxies. Similarly, holders of beneficial interests in the Global Notes will not have a direct right under the Global Notes to take enforcement action against the Issuer or the Guarantor in the event of a default under the Notes but will have to rely upon their rights under the Deed of Covenant. Minimum Denomination As the Notes have a denomination consisting of the minimum denomination plus a higher integral multiple of another smaller amount, it is possible that the Notes may be traded in amounts in excess of 50,000 (or its equivalent) that are not integral multiples of 50,000 (or its equivalent). In such case a Noteholder who, as a result of trading such amounts, holds a principal amount of less than the minimum denomination may not receive a Definitive Note in respect of such holding (should Definitive Notes be printed) and would need to purchase a principal amount of Notes such that its holding amounts to the minimum denomination. Credit Rating The Notes are expected to be rated BBB by Standard & Poor s Rating Services, a division of the McGraw Hill Companies, Inc. ( S&P ). One or more independent credit rating agencies may assign credit ratings to the Notes. The ratings may not reflect the potential impact of all risks related to structure, market, additional factors discussed above and other factors that may affect the value of the Notes. A security rating is not a recommendation to buy, sell or hold securities and may be subject to suspension, reduction or withdrawal at any time by the assigning rating agency. Any adverse change in an applicable credit rating could adversely affect the trading price for the Notes. EU Savings Directive Under EC Council Directive 2003/48/EC on the taxation of savings income, Member States are required to provide to the tax authorities of another Member State details of payments of interest (or similar income) paid by a person within its jurisdiction to an individual resident in that other Member State. However, for a transitional period, Belgium, Luxembourg and Austria are instead required (unless during that period they elect otherwise) to operate a withholding system in relation to such payments (the ending of such transitional period being dependent upon the conclusion of certain other agreements relating to information exchange with certain other countries). A number of non-eu countries and territories including Switzerland have agreed to adopt similar measures (a withholding system in the case of Switzerland) with effect from the same date. If a payment is to be made or collected through a Member State which has opted for a withholding system and an amount of, or in respect of tax is to be withheld from that payment, neither the Issuer, the Guarantor nor any Paying Agent nor any other person would be obliged to pay additional amounts with respect to any Note as a result of the imposition of such withholding 2

7 Level: 6 From: 6 Monday, June 11, :46 am g5mac Intro : 3738 Intro tax. For so long as any Note is outstanding, the Issuer undertakes to maintain a Paying Agent in a Member State of the European Union that does not impose an obligation to withhold or deduct tax pursuant to this Directive. Risks Relating to the Market Generally There is no active trading market for the Notes The Notes are new securities which may not be widely distributed and for which there is currently no active trading market. If the Notes are traded after their initial issuance, they may trade at a discount to their initial offering price, depending upon prevailing interest rates, the market for similar securities, general economic conditions and the financial condition of the Issuer and the Guarantor. Although applications have been made for the Notes to be admitted to listing on the Luxembourg Stock Exchange and to trading on the Luxembourg Stock Exchange s regulated market, there is no assurance that such applications will be accepted or that an active trading market will develop. Accordingly, there is no assurance as to the development or liquidity of any trading market for the Notes. Lack of liquidity may have a severely adverse effect on the market value of the Notes. Exchange rate risks and exchange controls The Issuer will pay principal and interest on the Notes in euro. This presents certain risks relating to currency conversions if an investor s financial activities are denominated principally in a currency or currency unit (the Investor s Currency ) other than euro. These include the risk that exchange rates may significantly change (including changes due to devaluation of the euro or revaluation of the Investor s Currency) and the risk that authorities with jurisdiction over the Investor s Currency may impose or modify exchange controls. An appreciation in the value of the Investor s Currency relative to the euro would decrease (1) the Investor s Currency-equivalent yield on the Notes; (2) the Investor s Currency equivalent value of the principal payable on the Notes; and (3) the Investor s Currency equivalent market value of the Notes. Government and monetary authorities may impose (as some have done in the past) exchange controls that could adversely affect an applicable exchange rate. As a result, investors may receive less interest or principal than expected, or no interest or principal. Interest rate risks Investment in the Notes involves the risk that subsequent changes in market interest rates may adversely affect the value of the Notes. Legal investment considerations may restrict certain investments The investment activities of certain investors are subject to legal investment laws and regulations, or review or regulation by certain authorities. Each potential investor should consult its legal advisers to determine whether and to what extent (1) the Notes are legal investments for it, (2) the Notes can be used as collateral for various types of borrowing and (3) other restrictions apply to its purchase or pledge of any Notes. Financial institutions should consult their legal advisors or the appropriate regulators to determine the appropriate treatment of the Notes under any applicable risk-based capital or similar rules. 3

8 Level: 6 From: 6 Monday, June 11, :46 am g5mac Intro : 3738 Intro Risks Relating to the Issuer and the Guarantor Factors that may affect the Issuer s ability to fulfil its obligations under the Notes Status of Issuer Risks specific to the Issuer are closely linked to the general risks faced by investors in Croatia. Among other risks, HBOR as a State-owned development finance bank depends on the structural soundness of fiscal policy in Croatia. As prescribed by the HBOR Law, HBOR can only be wound up by statute. Nonetheless, it is possible that amendments to the HBOR Law could be passed by the Parliament of the Republic of Croatia that could affect this status. So far as the Issuer or Guarantor is aware, there are presently no plans to alter this status or the status of the Guarantee nor are there any plans to change the current ownership structure of the Issuer. Foreign exchange risk The Issuer is exposed to foreign exchange risk. HBOR, like all Croatian banks, depends on exchange rate stability between the Kuna and the euro as its lending is primarily made in Kuna (indexed to euro) and own borrowing is primarily euro-denominated. As such, HBOR has to hedge its foreign exchange risk, which it does through the use of foreign exchange clauses in its loan agreements. Liquidity risk The Issuer is exposed to liquidity risk. The Issuer monitors and analyses the collection of receivables when they become due, on a daily, weekly, monthly, quarterly and yearly basis, the intention being to enable it to plan and meet all of its obligations and liabilities when due. Although the Issuer believes that it maintains adequate levels of liquidity reserves and monitors current liquidity continuously, and although the Issuer believes that it has sufficient Kuna and foreign currency funds necessary for the settlement of its obligations when they become due and for the disbursements on long term lendings, any failure of these provisions may have a material adverse effect on the Issuer s business and financial condition. Interest rate risk The Issuer is exposed to interest rate risk, which is the sensitivity of the Issuer s financial condition to movements in interest rates due to any mismatches or gaps in the amount of assets, liabilities and off-balance sheet instruments that mature or reprice in a given period. The Issuer reduces this risk by matching the repricing of assets and liabilities. Although the Issuer believes that it maintains adequate levels of controls and monitoring on such risk, any failure of these controls, particularly as a result of the introduction of a new information technology system, may have a material adverse effect on the Issuer s business and financial condition. Credit risk The Issuer is exposed to the credit risk, which is the risk that one party to a financial instrument might fail to discharge an obligation and cause the other party to incur a financial loss. Such credit risk is heightened, particularly in the case of medium and small businesses, by a scarcity of reliable information about potential borrowers. The Issuer manages its exposure to credit risk by the application of a variety of control measures, such as regular assessment of its positions using agreed credit criteria, diversification of sector risk to avoid undue concentration in type of business or in geographic terms and, where necessary, obtaining acceptable collateral to reduce the level of credit risk. Although the Issuer believes that it maintains adequate levels of controls and monitoring on such risk, any failure of these controls may have a material adverse effect on the Issuer s business and financial condition. 4

9 Level: 6 From: 6 Monday, June 11, :46 am g5mac Intro : 3738 Intro Factors that may affect the Guarantor s ability to fulfil its obligations under the Guarantee The Republic of Croatia General Since gaining its independence in 1992, Croatia s political, legal, judicial and regulatory structures have undergone extensive changes with a view to Croatia joining the European Union (the EU ) and the North Atlantic Treaty Organisation (the NATO ). To the extent that such structures have been changed, they have not been fully tested. As a consequence, investment in Croatia carries risks which are not typically associated with investing in more mature markets. Political Considerations Since 1993, Croatia has been pursuing a programme of economic structural reform which has resulted in the establishment of a free market economy through privatisation of state enterprises and deregulation of the economy. Croatia s stable political scene has been facilitated by the European Union and the commencement of EU accession negotiations, which commenced in November The Government has reaffirmed its intention to continue the strategy in favour of a pro-european, mainstream conservative orientation that is committed to democracy, the rule of law, human rights and minority rights. Although this stability is expected to continue as EU commitments encourage the development of stronger national institutions and as Croatia intends to place emphasis on harmonising its activities with the acquis communautaire of the EU, there can be no assurance that the target date for EU accession (presently the end of the decade) will be met. The accession of the Republic of Croatia to the EU depends on the successful conclusion of ongoing negotiations with the relevant EU bodies and on the level of Croatia s harmonisation with the acquis communautaire. The implementation of the acquis communautaire in Croatia may have a significant impact on, inter alia, the Croatian legal and economic systems. Economic Infrastructure Croatia has made the transition to a functioning market economy and has enjoyed sustained growth since the mid-1990s. Inflation averages 2.5 per cent. per annum and economic growth is expected to continue in During the last decade, the Croatian National Bank ( CNB ) monitored the movement of the domestic currency Kuna against the euro, which exchange rate varied by approximately 7 per cent. from the average exchange rate. The rebuilding of Croatia s infrastructure to a Western European standard requires further investment and may take some years to complete. The unemployment rate has been gradually reducing year on year since 2000 and it is expected that this trend will continue. The promotion of the growth of small and mediumsized and export-oriented enterprises is expected to continue in order to meet its goal of maintaining strong growth rates and fostering sustainable development within the framework of a market-oriented, stable and predictable business environment. Official Economic Data The Croatian Central Bureau of Statistics ( CBS ), the Ministry of Finance and CNB regularly publish statistics on Croatia and its economy. There can be no assurance that the statistics are as accurate as those compiled by statistics bureaus in developed countries, but in recent years major adjustments have been made in line with international methodologies. As a member of International Monetary Fund ( IMF ), Croatia is also a subscriber to the Special Data Dissemination Standard established by the IMF. Although subscription is voluntary, it carries a commitment by a subscribing member to observe the standard and to provide certain information to the IMF about its practices in disseminating economic and financial data. 5

10 Level: 6 From: 6 Monday, June 11, :46 am g5mac Intro : 3738 Intro Economic Development The average annual growth of gross domestic product ( GDP ) in the period 2000 to 2006 was at the level of 4.5 per cent. This growth was determined by the growth in domestic demand based on the growth in personal consumption and investments in fixed capital. In 2004, GDP grew by 3.8 per cent. in real terms, which reflected a slowdown in economic growth in comparison with the GDP real growth rate for 2003 (5.3 per cent.). According to CNB data, the GDP real growth rate in 2005 stood at 4.3 per cent., while the GDP real growth rate in 2006 stood at 4.8 per cent. Forecasted GDP growth for 2007 and 2008 is 4.7 per cent. and 4.5 per cent., respectively (source: IMF website). Although the CNB has indicated that it would continue to implement measures to reduce foreign borrowing by commercial banks in Croatia, as this is perceived to be a significant constituent in the high levels of foreign borrowing, there can be no assurance that such policies will be effective. If foreign debt persists at high levels, or if the Croatian economy becomes subject to high inflation or reduced GDP, this could have a material adverse effect on the Issuer s business and financial condition. Croatia s Legal System Croatia has taken, and continues to take, steps to move towards a mature legal system which is comparable to the legal systems of the EU countries. New laws have been introduced and revisions have been made with respect to company, property, competition, securities, labour, taxation, etc. in order to harmonise them with EU laws. Such new laws and revisions remain untested in the courts and do not have a long history of interpretation. In some circumstances, therefore, it may not be possible to obtain swift enforcements of judgments in Croatia or predict the outcome of legal proceedings subject to these new laws. Croatian Investors The Notes and Coupons (each as defined herein) are governed by English law and the Issuer has submitted to the non-exclusive jurisdiction of the courts of England to settle any disputes that may arise out of or in connection with any Note or Coupon (see Terms and Conditions of the Notes Governing Law, Jurisdiction, Service of Process and Waiver of Immunity, below). In respect of any proceedings between the Issuer and a Croatian natural or legal person, a Croatian court may refuse to recognise and give effect to the choice of English law as the law governing the Notes and Coupons and may also, in certain cases set forth by law, refuse to recognise and enforce an English court judgment awarded in connection therewith in the Republic of Croatia. In respect of any proceedings between the Issuer and a non-croatian natural or legal person, the relevant court of the Republic of Croatia may refuse the recognition and/or enforcement of a foreign judgment according to the provisions of the Croatian Law on Resolving Conflicts of Law with Other Countries Laws and Regulations in Certain Matters (Official Gazette No. 51/1991). Guarantee The Guarantee is contained in Article 8, paragraphs 2 and 3 of the HBOR Law. The Guarantee is, therefore, governed by Croatian law. Further to the provisions of the HBOR Law, the State guarantee of HBOR s borrowings is also governed by the provisions of the Obligations Law (The Official Gazette of Croatia (Narodne novine) No. 35/05), generally setting forth the rules that apply to the relations between the Guarantor and the beneficiary of the guarantee, and between the Issuer and the Guarantor (in this regard, please see Letter of Representation ). The State guarantee is therefore subject to future change in law, although it cannot be annulled or varied retrospectively. As far as the Issuer and the Guarantor are aware, there are presently no plans to amend, vary or otherwise change the State guarantee. 6

11 Level: 6 From: 6 Monday, June 11, :19 pm g5mac Section 01 : 3738 Section 01 OVERVIEW OF THE OFFERING The following overview refers to certain provisions of the Terms and Conditions of the Notes and is qualified by the more detailed information contained elsewhere in this Prospectus. Terms which are defined in Terms and Conditions of the Notes have the same meaning when used in this overview. Issuer: Guarantor: Lead Managers: Managers: Fiscal Agent: Hrvatska banka za obnovu i razvitak (The Croatian Bank for Reconstruction and Development). The Republic of Croatia. Deutsche Bank AG, London Branch and UBS Limited. Dexia Banque Internationale à Luxembourg, société anonyme, acting under the name of Dexia Capital Markets, DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main, EFG Ergasias S.A. and Hypo Alpe-Adria-Bank International AG. Deutsche Bank AG, London Branch. The Notes: 250,000,000 5 per cent. Guaranteed Notes due Issue Price: per cent. of the principal amount of the Notes. Issue Date: Expected to be on or about 14 June Maturity Date 14 June Use of Proceeds: Interest: Status of the Notes and the Guarantee: Form and Denomination: The net proceeds of the Notes will be used by the Issuer for its general financing purposes. See Use of Proceeds. The Notes will bear interest on their outstanding principal amount from 14 June 2007 at a rate of 5 per cent. per annum payable annually in arrear on 14 June in each year, commencing on and including 14 June The Notes are senior, unsubordinated, unconditional and unsecured obligations of the Issuer. The Guarantee is a senior, unsubordinated, unconditional and unsecured obligation of the Guarantor, under which the due payment of all sums expressed to be payable by the Issuer under the Notes is unconditionally and irrevocably guaranteed by the Guarantor pursuant to the HBOR Law. See Representation Letter and Terms and Conditions of the Notes Status and Guarantee. The Notes will be issued in bearer form in the denominations of 50,000 and, for so long as the Notes are represented by a Global Note and Euroclear and Clearstream, Luxembourg (or any other relevant clearing system) allow, will be tradeable in integral multiples of 1,000 in excess thereof, up to and including 99,000. The Notes will initially be in the form of a temporary global note (the Temporary Global Note ), without interest coupons, which will be deposited on or around the Closing Date with a common depositary for Euroclear and Clearstream, Luxembourg. The Temporary Global Note will be exchangeable, in whole or in part, for interests in the Permanent Global Note, without interest coupons, not earlier than 40 days after the Closing Date upon certification as to non-u.s. beneficial 7

12 Level: 6 From: 6 Monday, June 11, :47 am g5mac Section 01 : 3738 Section 01 ownership. Definitive Notes will only be available in the limited circumstances set out on the Permanent Note. Redemption at the Option of the Issuer for Tax Reasons: Negative Pledge: Cross Default: Rating: Withholding Tax: Governing Law: Listing and Trading: Clearing Systems: Selling Restrictions: Early redemption by the Issuer will only be permitted for tax reasons as described in Condition 5 (Redemption and Purchase). The Terms and Conditions of the Notes will contain a negative pledge provision as further described in Condition 3 (Negative Pledge). The Terms and Conditions of the Notes will contain a cross default provision as further described in Condition 8 (Events of Default). The Notes are expected to be rated BBB by S&P. All payments in respect of principal and interest by or on behalf of the Issuer and the Guarantor shall be made free and clear of, and without withholding or deduction for, any taxes, duties, assessments or governmental charges of whatsoever nature imposed, levied, collected, withheld or assessed by the Republic of Croatia or any other jurisdiction or any political subdivision or any authority thereof or therein having power to tax, unless such withholding or deduction is required by law. In that event, the appropriate withholding or deduction shall be made and the Issuer or the Guarantor shall pay any additional amounts to Noteholders to compensate for such withholding or deduction with the exception of certain circumstances, as more fully described in Condition 7 (Taxation). The Notes, the Agency Agreement, the Deed of Covenant and the Subscription Agreement will be governed by English law. The Guarantee will be governed by Croatian law. Applications have been made for the Notes to be admitted to listing on the Luxembourg Stock Exchange and to trading on the regulated market of the Luxembourg Stock Exchange. Euroclear S.A./N.V. and Clearstream, Luxembourg. See Subscription and Sale. There are restrictions on the offer, sale and delivery of the Notes in, inter alia, the United States, the United Kingdom and the Republic of Croatia. Risk Factors: Investing in the Notes involves risks. See Risk Factors. 8

13 Level: 6 From: 6 Monday, June 11, :47 am g5mac Section 01 : 3738 Section 01 REPRESENTATION LETTER 14 June 2007 To: (1) Deutsche Bank AG, London Branch and UBS Limited (together, the Lead Managers ) and the other Managers (together with the Lead Managers, the Managers ) party to the Subscription Agreement dated 12 June 2007 (the Subscription Agreement ) Dear Sirs c/o Deutsche Bank AG, London Branch Winchester House 1 Great Winchester Street London EC2N 2DB (2) The holders of the Notes from time to time and all Account holders (as defined in the Deed of Covenant referred to herein.) HRVATSKA BANKA ZA OBNOVU I RAZVITAK (The Croatian Bank for Reconstruction and Development) (the Issuer ) 250,000,000 5 per cent. Guaranteed Notes due 2017 (the Notes ) having the benefit of a statutory guarantee (the Statutory Guarantee ) from THE REPUBLIC OF CROATIA (the Guarantor ) We refer to the Subscription Agreement, the Statutory Guarantee and the Preliminary Prospectus dated 1 June 2007 and the Prospectus dated 12 June All capitalised terms not otherwise defined herein shall have the meaning assigned to them in the Terms and Conditions of the Notes or the Subscription Agreement, unless specified otherwise. References herein to Prospectus shall be deemed to include the prospectus in preliminary and in final form (and any amendments, supplements or modifications thereto). 1. Representations and Warranties. For the benefit of the Managers entering into the Subscription Agreement, we hereby represent and warrant to the Managers and each of them as at the date hereof and as at each date between the date hereof and the closing date of the Notes (including on the closing date) that: Prospectus: (i) the Prospectus contains all information with respect to the Guarantor that is material in the context of the Notes and the Statutory Guarantee and which, according to the particular nature of the Guarantor and the Statutory Guarantee is necessary to enable investors and their investment advisers to make an informed assessment of the assets and liabilities, financial position and prospects of the Guarantor and of the rights attaching to the Notes and to the Statutory Guarantee; (ii) the statements contained in the Prospectus relating to the Guarantor and the statistical information contained therein are in every material respect true and accurate and not misleading; (iii) the opinions and intentions expressed in the Prospectus with regard to the Guarantor are honestly held, have been reached after considering all relevant circumstances and are based on reasonable assumptions; (iv) there are no other facts in relation to the Guarantor or the Statutory Guarantee the omission of which would, in the context of the issue of the Notes and the Statutory Guarantee, make any statement in the Prospectus misleading; and (v) all reasonable enquiries have been made by the Guarantor to ascertain such facts and to verify the accuracy of all such information and statements; The Statutory Guarantee: (i) the Statutory Guarantee was created pursuant to the HBOR Law; (ii) the Guarantor has the power to grant and perform its obligations under 9

14 Level: 6 From: 6 Monday, June 11, :47 am g5mac Section 01 : 3738 Section 01 the Statutory Guarantee and has taken all necessary actions to authorise its unconditional, irrevocable and on-demand guarantee of the Notes and the delivery and performance of the Statutory Guarantee; (iii) no action or thing is required to be taken, fulfilled or done (including, without limitation, the obtaining of any consent or licence or the making of any filing or registration) for the validity, performance or enforceability of the Statutory Guarantee under any applicable laws and regulations; (iv) the Statutory Guarantee is unconditional, irrevocable and payable on first demand, constitutes the valid, legally binding and enforceable obligation of the Guarantor, enforceable against the Guarantor in accordance with its terms, (v) the Statutory Guarantee covers every payment and monetary obligation of the Issuer to any party in respect of the Notes and/or the Issue Documents; (vi) the payment obligations of the Guarantor under the Statutory Guarantee rank, and will rank, at least equally with all its other present and future unsecured indebtedness of the Guarantor; (vii) no stamp, registration, documentary or similar taxes are payable by reason of granting of the Statutory Guarantee or in relation to any enforcement proceedings in respect of the Statutory Guarantee brought in the courts of the Republic of Croatia, other than nominal court fees; (viii) all payments by the Guarantor in respect of the Statutory Guarantee or any payment obligation contemplated by (v) above will be made without withholding or deduction for or on account of any taxes, duties, assessments or governmental charges in the Republic of Croatia or, if such withholding or deduction is made, the Guarantor shall pay such additional amounts as will result in receipt by the Noteholders and the Couponholders after such withholding or deduction of such amounts as would have been received by them had no such withholding or deduction been required, (except in the limited circumstances described in Condition 7 (Taxation)); (ix) the obligations of the Guarantor under the Statutory Guarantee are undertaken as principal obligor and not merely as surety; (x) neither the obligations of the Guarantor under this Representation Letter and the Statutory Guarantee nor the rights, powers and remedies conferred upon the Accountholders (as defined in the Deed of Covenant) by this Representation Letter and the Statutory Guarantee or by any other applicable law shall be discharged, impaired or otherwise affected by: any of the obligations of the Issuer under or in respect of the Notes or the Deed of Covenant which are undertaken by the Guarantor pursuant to this Representation Letter being or becoming illegal, invalid, unenforceable or ineffective in any respect; any amendment to, or any variation, waiver or release of, any obligation of the Issuer under or in respect of the Notes or the Deed of Covenant or any security or other guarantee or indemnity in respect thereof, however fundamental; any other act, event or omission which might operate to discharge, impair or otherwise affect the obligations expressed to be assumed by the Guarantor pursuant to this Representation Letter and the Statutory Guarantee or any of the rights, powers or remedies conferred upon the Noteholders or Accountholders (as defined in the Deed of Covenant) or any of them by the Statutory Guarantee or by any other applicable law; (xi) the obligations of the Guarantor under the Statutory Guarantee constitute continuing obligations, notwithstanding any settlement of account or other matter or thing whatsoever and shall not be considered satisfied by any intermediate payment or satisfaction of all or any of the Issuer s obligations under or in respect of any Note or the Deed of Covenant and shall continue in full force and effect until all sums due from the Issuer in respect of the Notes and under the Deed of Covenant have been paid, and all other actual or contingent obligations of the Issuer under or in respect of any Note or the Deed of Covenant have been satisfied, in full; and (xii) the Statutory Guarantee cannot cease to exist (in respect of any outstanding Notes), or be retrospectively withdrawn or annulled, due to a change in the laws of the Republic of Croatia; No Conflict: neither the entry into nor the performance of the Statutory Guarantee does or will (i) conflict with or result in a breach of any of the terms or provisions of, 10

15 Level: 6 From: 6 Monday, June 11, :47 am g5mac Section 01 : 3738 Section 01 or constitute a default under the documents constituting the Guarantor; (ii) violate in any respect any provision of any law or regulation of or applicable in the Republic of Croatia to which it is subject, any judgement, order or permit applicable to it or of any mortgage, indenture, contract or other undertaking to which it is a party or which is binding upon it or any of its assets or revenues; or (iii) result in the creation or imposition of any mortgage, charge, pledge, lien or other security interest on any of its assets or revenues; and Capacity and authorisation: the Guarantor has full power and capacity to own or lease its property and assets as described in the Prospectus, and has full power and capacity to give the Statutory Guarantee, to execute this Representation Letter and to undertake and perform the obligations expressed to be assumed by it herein and therein, and the Guarantor has taken all necessary action to approve and authorise the same The Stabilisation and Association Agreement: the Croatian Competition Agency (Agencija za zaštitu tržišnog natjecanja) (the Agency ), which has been established under the Decision Establishing the Croatian Competition Agency (published in the Official Gazette (Narodne novine) No. 73/95 and 78/95) and Articles 70(3) and (4) of the Stabilisation and Association Agreement between the European Communities and the Republic of Croatia (the SAA ), which is endowed with, amongst other things, the power to apply the provisions of Article 70(1)(iii) of the SAA and the provisions of the Croatian State Aid Law (published in the Official Gazette of the Republic of Croatia (Narodne novine) No. 140/05) (the State Aid Law ) and to authorise State aid under the SAA (including the power to issue prior binding opinions on any proposed legislative measure containing a State aid element), has, following a proper consideration of all relevant information furnished to it by the authorities of the Guarantor, examined the Statutory Guarantee and the relationship between the Issuer and the Guarantor in so far as all liabilities of the former are automatically guaranteed by the latter pursuant to the HBOR Law. In accordance with Article 6 paragraph 4 of the State Aid Law, which provides for the criteria governing the proper application of the rules on State aid arising from Article 70 of the SAA, and in accordance with Article 10 of the State Aid Law the Croatian Government departments and the other public authorities are required, before presenting to the Government a legislative measure which may contain any form of State aid, to submit such proposed measure to the Agency which needs to investigate the measure before issuing its prior binding opinion. On 3 November 2006 the Agency received a letter from the Ministry of Finance attached to which was the complete final draft proposal of the HBOR Law, including the wording of the Statutory Guarantee. On 23 November 2006 the Agency issued the Prior Binding Opinion on the complete final draft proposal of the HBOR Law. The Agency concluded that the measures contained in the draft proposal of the HBOR Law were compatible with the rules on State aid, including the State Aid Law and the SAA, on the basis of the fact that HBOR s activities are mainly serving the policies of the Government of Croatia, and are by law required to be compatible with the State aid legislation. For the purpose of transparency and avoidance of doubt in the implementation of the HBOR Law, the Agency was of the opinion that in Article 10 of the draft proposal of the HBOR Law paragraph 5 should be inserted, requiring HBOR to conduct its activities in accordance with State aid legislation. The Prior Binding Opinion contained no amendments, reservations or imposed any conditions with regard to the Statutory Guarantee or Article 8 of the HBOR Law, in which the Statutory Guarantee is stipulated; that means that the Statutory Guarantee is compatible with the State Aid Law and the SAA and does not constitute unlawful State aid for their purposes. The above Prior Binding Opinion of the Agency was published in the Official Gazette (Narodne novine) No. 130/06 and on the Internet at 11

16 Level: 6 From: 6 Monday, June 11, :47 am g5mac Section 01 : 3738 Section 01 A certified translation thereof is attached hereto. 2. Managers Indemnity. Without prejudice to the other rights or remedies of the Managers, we hereby undertake to each Manager that we will indemnify and hold harmless such Manager or any of its affiliates, any person who controls such Manager within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and/or any of their respective representatives, directors, officers, employees and agents (each, an Indemnified Person ) from and against any and all losses, liabilities, costs, claims, damages, expenses (including, but not limited to, legal costs and expenses reasonably incurred) or demands (or actions in respect thereof) which any of them may incur or which may be made against any of them as a result of, in connection with or in relation to: (a) (b) (c) (d) any actual or alleged breach or any actual or alleged inaccuracy of the representations, warranties, confirmations, statements and undertakings contained herein, or made or deemed to be made by the Guarantor pursuant to the provisions hereof; or any untrue or misleading (or allegedly untrue or misleading) statement in, or any omission (or alleged omission) from the Prospectus; or any untrue or misleading (or allegedly untrue or misleading) statement in any additional written information provided by the Guarantor to the Managers in connection with all statements of fact contained in the materials prepared by the Issuer and/or the Guarantor for the roadshows made by the Managers in connection with the issue of the Notes and all statements of fact made by the Issuer and/or the Guarantor at the roadshows; or the costs and expenses of the Issuer and the Lead Managers incurred in connection with the issue of the Notes (including, but not limited to, all legal fees and expenses and any travelling, communication, courier, postage and other out-of-pocket expenses) (all as allocated, apportioned and paid as laid out in the separate fees side letter dated 9 May 2007), and such indemnity shall extend to include all reasonable costs, charges and expenses (including but not limited to, legal costs and expenses reasonably incurred) which that Indemnified Person may pay or incur in investigating, disputing or defending any claim or action in respect of which indemnity may be sought against the Guarantor under this provision (a Loss ). The Guarantor shall pay to that Manager on demand an amount equal to such Loss. No Manager shall have any obligation, whether as fiduciary for any Indemnified Person or otherwise, to recover any such payment or to account to any other person for any amounts paid to it under this provision. This indemnity is additional to any liability the Guarantor might otherwise have. 3. Croatian accession to the European Union. The Guarantor hereby undertakes to the Managers and each of them that it will ensure that its authorities and officials will make every effort and take any measures, including formal and informal representations and notifications to the European Commission, to ensure that the HBOR Law (as amended from time to time) and any other aid provided by the Guarantor to the Issuer in any form whatsoever become existing aid under Article 88(1) of the EC Treaty and Article 1(b)(i) of Regulation (EC) 659/99 as will be amended by the relevant provisions of the future Accession Treaty between the Republic of Croatia and the European Union. The Guarantor also hereby confirms that its authorities and representatives from the Issuer were part of the Negotiating Team for the Accession of the Republic of Croatia to the European Union and its Working Groups for the Preparation of Negotiations (the delegation ), which met, within the bilateral screening for Chapter 8 Competition and Chapter 20 Industrial Policy and Entrepreneurship, with the European Commission in 12

17 Level: 6 From: 6 Monday, June 11, :47 am g5mac Section 01 : 3738 Section 01 Brussels on 5 and 6 December 2005 and 27 and 28 April The delegation made representations to the European Commission (including officials from the Directorate- Generale Competition) regarding the operations of the Issuer and the relevant provision of the special law on HBOR which was in force at the time, and which in terms of the rules on State aid arising from Article 70 of the SAA were in substance very similar, if not identical, to the provisions of the HBOR Law, at least in respect of the Statutory Guarantee. To the best of the Guarantor s knowledge the European Commission has never raised any issues in relation to the representations made on State aid concerning the Issuer and has not asked for any additional information on State aid concerning the Issuer from the authorities of the Guarantor or the representatives of the Issuer. 4. Law and Jurisdiction 4.1 Governing Law: This deed and all matters arising from or connected with it are governed by, and will be construed in accordance with, English law. 4.2 English courts The courts of England have exclusive jurisdiction to settle any dispute (a Dispute ), arising from or connected with this letter (including a dispute regarding the existence, validity or termination of this letter) or the consequences of its nullity. 4.3 Appropriate forum The parties agree that the courts of England are the most appropriate and convenient courts to settle any Dispute and, accordingly, that they will not argue to the contrary. 4.4 Rights of the Managers to take proceedings outside England Clause 4.2 (English courts) is for the benefit of the Managers only. As a result, nothing in this Clause 4 (Law and Jurisdiction) prevents the Managers from taking proceedings relating to a Dispute ( Proceedings ) in any other courts with jurisdiction. To the extent allowed by law, the Managers may take concurrent Proceedings in any number of jurisdictions. 4.5 Process agents The Guarantor agrees that the documents which start any Proceedings and any other documents required to be served in relation to those Proceedings may be served on it by being delivered to Ince Process Agents Limited with its registered address at 5th floor International House, 1 St Katharine s Way, London E1W 1AY or, if different, its registered office for the time being or at any address of the Guarantor in Great Britain at which process may be served on it in accordance with Part XXIII of the Companies Act If such person is not or ceases to be effectively appointed to accept service of process on behalf of the Guarantor, the Guarantor (acting together) shall, on the written demand of any Manager addressed and delivered to the Guarantor appoint a further person in England to accept service of process on its behalf and, failing such appointment within 15 days, any Manager shall be entitled to appoint such a person by written notice addressed to the Guarantor and delivered to the Guarantor. Nothing in this paragraph shall affect the right of any Manager to serve process in any other manner permitted by law. This clause applies to Proceedings in England and to Proceedings elsewhere. 4.6 Consent to enforcement etc. The Guarantor consents generally in respect of any Proceedings to the giving of any relief or the issue of any process in connection with such Proceedings including (without limitation) the making, enforcement or execution against any property whatsoever (irrespective of its use or intended use) of any order or judgment which is made or given in such Proceedings. 13

18 Level: 6 From: 6 Monday, June 11, :47 am g5mac Section 01 : 3738 Section Waiver of immunity To the extent that the Guarantor may in any jurisdiction claim for itself or its assets or revenues immunity from suit, execution, attachment (whether in aid of execution, before judgment or otherwise) or other legal process and to the extent that such immunity (whether or not claimed) may be attributed in any such jurisdiction to the Guarantor or its assets or revenues, the Guarantor agrees not to claim and irrevocably waives such immunity to the full extent permitted by the laws of such jurisdiction. IN WITNESS whereof this deed has been executed by the Guarantor and is intended to be and is hereby delivered on the date first before written. EXECUTED as a deed ) by THE GOVERNMENT OF THE REPUBLIC OF CROATIA ) represented by the Minister of Finance ) Ivan Šuker Minister of Finance 14

19 Level: 6 From: 6 Monday, June 11, :47 am g5mac Section 01 : 3738 Section 01 ANNEX TO REPRESENTATION LETTER 15