TERMS OF REFERENCE Cross-Regional: Provision of research coverage for selected listed SMEs - Preparation of investment research reports 1. BACKGROUND The Technical Cooperation (TC) project is taking place within the European Bank for Reconstruction and Development (the EBRD or the Bank ) Initiative on Local Currency and Capital Markets Development (LC2). This Bank-wide strategic Initiative aims to identify and support sequenced reforms and policies in the EBRD s countries of operations (COOs) that contribute to local currency and local capital market development. One of the ways that the Bank supports this role is in producing focused studies and providing assistance to developing the local capital markets based on international standards and best practices. Increasing the access to capital market financing for small and medium sized companies (SMEs) 1 is thereby one of the focus areas of LC2. According to the Organisation for Economic Co-operation and Development, small and medium sized companies (SMEs) represent the dominant form of business organisations, accounting for over 95% and up to 98% of enterprises, depending on the country. In the European Union countries, nearly 99% of all enterprises are SMEs. 2 Especially in emerging economies, SMEs are the driving force behind economic growth, employment, poverty alleviation and wealth creation. But SMEs face more severe credit conditions than larger companies, including higher interest rates, shorter maturities and increased collateral. 3 SMEs who pursue strategic growth strategies seek capital raising through Initial Public Offering (IPO). When companies become listed, they have access to capital market financing and can attract domestic as well as international investors. This is highly dependent on good quality research coverage to operate at their full potential investors need access to full information on companies in order to de-risk their positions and therefore to make informed investment decisions. The Markets in Financial Instruments Directive (MiFID II) which came into effect on 3 January 2018 is bringing significant changes to the capital markets legal environment in the EU, and it will have profound impact on SMEs access to finance through capital markets. While the new directive supports the introduction of alternative forms of financing like crowdfunding and SME growth markets, which would refocus SME financing through exchanges, it decouples the provision and distribution of investment research by banks and brokers from trade execution with a view that investors can better compare price and quality across products and service levels. Consequently, the sell-side will have to charge a fee for investment research separately from execution services. The buy-side will have to allocate research budgets for all asset classes, and either pass the costs of research on to clients or absorb it themselves. Research budgets are foreseen to be cut and analysts expected to move to the buy-side. According to the CFA institute survey 4 there are concerns that SMEs will have less coverage and liquidity, which could increase research fees and lead to an increase in the cost of capital and 1 EU SME definition: http://ec.europa.eu/growth/smes/business-friendly-environment/sme-definition/index_en.htm. 2 Source: SME Performance Review, http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/performancereview/files/supporting-documents/2014/annual-report-smes-2014_en.pdf. 3 Source: Financing SMEs and Entrepreneurs 2012: An OECD Scoreboard. 4 Source: https://www.cfainstitute.org/ethics/documents/mifid_ii_report.pdf.
hinder SMEs ability to raise capital or list on the market. This could eventually have a negative impact over SME companies. In order to address the new challenges in light of MiFID II, increase the availability of market financing opportunities for SMEs and increase investors awareness of under-researched companies the EBRD is planning to introduce a programme to support the research coverage for a set of SMEs listed on the stock exchanges in Bulgaria, Croatia, North Macedonia, Romania, Serbia and Slovenia. The Research Coverage Programme (the Programme ) will be overseen by the EBRD, but will entail a high degree of engagement from local stakeholders in each of the markets, including regulators, stock exchanges, financial service providers and listed companies. The Programme will provide free, publicly available, high quality research reports to investors to overcome information barriers which depress market liquidity, ultimately aiming to increase the availability of market financing opportunities for all SMEs by making the market more transparent to investors, creating success stories and generating spill-over effects. The research coverage will work at both local and regional levels: At local level, research will focus closely on the specifics of listed SMEs At regional level, regional coordination will ensure aligned delivery of services and sharing of best practices, while research will be targeted at international/regional investors The Programme will fill the gap in research coverage of SMEs which constrains capital markets and their liquidity due to a lack of investor awareness of un-researched companies. The Programme is fully aligned to the objectives of the Capital Markets Union Action Plan on Building a Capital Markets Union, published by the European Commission, which specifically mentions improving access to finance, including risk capital, notably for SMEs 5 as one of the five priority areas for development. 2. OBJECTIVES Overall objective The overall objective of the assignment is to increase the information base and public awareness for listed SMEs. Specific objective The specific objective of this project is to increase the public availability of investment research for selected SMEs listed on the local stock exchanges. 3. SCOPE OF WORK In order to fulfil the objectives mentioned above, the EBRD is now seeking to commission the services of highly specialised consultant (the Consultant) to carry out the following assignment: Preparation of investment research reports The Consultant is expected to prepare equity research reports for listed companies which are currently receiving minimal or no research coverage. Listed companies fulfilling the criteria 5 Source: http://ec.europa.eu/finance/capital-markets-union/docs/building-cmu-action-plan_en.pdf, p.9. Terms of Reference Page 2 of 6
will be invited to participating in the programme. The aim is to increase the awareness about those companies, and to improve their market liquidity by publicly providing the investment community with high quality research reports. The research reports will be offered for free and will be made publicly available online through the investment research repository. The research coverage will cover selected SMEs which are listed on the stock exchanges in, Bulgaria, Croatia, North Macedonia, Romania, Serbia and Slovenia according to specific conditions. Depending on the success of the programme, the beneficiary stock exchanges/brokers may decide to continue offering partly funded research coverage or/and company-paid coverage after the end of EBRD s grant-funded assistance. The main activities of this assignment are: Definition of selection criteria of SME eligible to participate in the programme. Criteria should include company size, listing segment, financial and operational situation as well as current research coverage level. Additionally, companies commitment to participate in roadshows organised together with the local stock exchanges is a determinant factor in the selection process. Define in collaboration with the local stock exchanges, key market participants, selected investors and the EBRD research coverage programme characteristics including the research report content. The initial structure of the investment research reports shall include at minimum: o Company overview and business description; o Presentation of revenue structure and risk factors; o Financial fundamentals: Analysis of the company's recent financial indicators based on the balance sheet, profit and loss, cash-flow statements, financial targets, dividend policy, macro factors affecting the company, and financial forecast; o Peer group analysis; o Valuation summary and estimated fair value. Validate together with the EBRD and the local exchanges a shortlist of 5 (five) companies to be covered in the each of the six markets. Each company covered will have an initial research report providing a comprehensive overview and analysis on the company which will be followed by update reports based on financial results and ad hoc corporate events. Preparation and signing of Memoranda of Understanding (MoUs) with shortlisted companies to guarantee their commitment to the Programme. The total number of reports to be produced is at least 5 per each company across the time of the project. The frequency of the reports will be on half-yearly basis corresponding to the listed company's half and full year results. Additionally, ad hoc update reports are to be prepared in case of significant corporate events that would have an impact on the price. Terms of Reference Page 3 of 6
4. REPORTS AND DELIVERABLES The Consultant will provide the following reports and deliverables: # Deliverables Timing 1 Project kick-off meeting and programme design workshop At project commencement 2 Inception Report including the selection of Programme participants Within 4 weeks of project commencement 3 Sign the MoUs with shortlisted companies Within 6 weeks of project commencement 4 Produce at least 2 research reports per each From 6 weeks of project commencement company per year, and ad-hoc reports as required until project finish 5 Final Report summarising the delivered services, Within 24 months of project feedback received, achievements and lessons commencement learned The exact timing of the deliverables will be set in the Inception Report as agreed with the EBRD. Other deliverables may become relevant as the project progresses. These will be included as agreed with the relevant Consultant. All deliverables will be produced in English and submitted to the OL in hard copies and electronic format. All deliverables should be in form and substance satisfactory to the EBRD. The disbursement of payment will be contingent upon all deliverables being satisfied. 5. PROJECT COUNTERPART AND IMPLEMENTATION ARRANGEMENTS 5.1. The Consultant will be contracted by the EBRD and project oversight will be provided by the EBRD s Operation Leader (OL). The Consultant will report directly to the client and the EBRD's OL and will work closely with the project beneficiary stakeholders. The Consultant will have overall responsibility for delivering the assignment according to the agreed work plan and will as such manage the project implementation and actively monitor the progress achieved. The Consultant shall carry out the tasks stated herein through coordination and management provided by the OL, the assigned liaison person(s) of the beneficiary stakeholder(s) and any other person explicitly authorised by the OL. 5.2. The Project shall be managed by the EBRD s OL in consultation with the project beneficiary stakeholders, which are the main stock exchanges in Bulgaria, Croatia, North Macedonia, Romania, Serbia and Slovenia. The Consultants shall work under the guidance of the project OL. 5.3. The Consultant through its Team Leader (TL) will have overall responsibility for delivering the assignment according to the agreed work plan and will as such manage the project implementation and actively monitor the progress achieved. The TL will also be responsible for communication between the EBRD and the Consultant. The TL should cooperate closely with the OL nominated by the EBRD. The TL will bi-weekly report to the OL on the progress of the assignment, deliverables produced, and performance of the assignment against the agreed project timetable. Terms of Reference Page 4 of 6
5.4. The beneficiary stakeholders will nominate a project contact who will work closely with the OL and the Consultant. To support the work of the Consultant the beneficiary stakeholder will provide the Consultant with all information needed (as far as available) to successfully carry out the work as described in the Scope of Work. Furthermore, the beneficiary stakeholder will ensure that all required decisions to implement the project will be made according to the agreed work plan. 5.5. The beneficiary stakeholders will provide the premises and logistical support for the organisation of the planned stakeholder workshops and will invite the selected stakeholders as agreed with the Consultant. 5.6. The project 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 Consultant should not expect that EBRD, or the beneficiary stakeholders will provide logistical support and, therefore, the Consultant should provide its own office, communications and other assignment-related logistical support. 5.7. The beneficiary stakeholders will make in-kind contribution on this project. The direct cost of the project will be fully supported by EBRD donor fund. 5.8. The project language is English. All deliverables are to be delivered in English. 5.9. The indicative start date of the assignment is May 2019 and the estimated duration is up to 24 months. 6. CONSULTANTS PROFILE The Consultant will be a company which is specialised on equity investment research and the preparation of research reports. The Consultant must have a proven track record of working on similar consulting assignments. The Consultant has to propose a team of highly specialised experts who will carry out the assignment. The provided expertise should cover all areas as defined in the scope of work. It is expected that the Consultant s team of key experts will consist of: (a) Consultant Team Leader / Senior Securities Markets Expert Preferably 5 years experience in investment analysis/research. Preferably 3 years of project management experience including acting as Team Leader on similar assignments. Excellent knowledge of international standards and EU Directives (especially MiFID2/MiFIR). Acted as a team leader/ expert in minimum 2 similar projects. Previous experience on investment research level is preferred. Excellent communication, analytical, report writing and presentation skills. Proficiency in written and spoken English language, local language skills are an advantage. Terms of Reference Page 5 of 6
(b) Pool of equity research specialists Preferably 8 years experience related to corporate finance and securities markets with special focus on: Equity research. Preferably 3 years experience in the preparation of equity research reports and company analysis. Preferably CFA designation. Proficiency in written and spoken English language. Local language skills are a distinctive advantage. If an expert can cover various expert roles this has to be clearly stated in the Expression of Interest and reflected in the CV(s) and the proposed work plan accordingly. The Consultant must ensure that its project team is provided with computers and the technical equipment needed for the implementation of the assignment. The consultant should not expect that EBRD will provide logistical support and, therefore, the consultant should provide as far as required his or her own communications, interpretation/translation, and other assignmentrelated logistical support. 7. DONOR VISIBILITY The donor for this assignment is expected to be the TaiwanBusiness EBRD Cooperation Fund. TaiwanBusiness EBRD Cooperation Fund requires adequate visibility for its contribution. The Consultant shall collect evidence of donor's visibility, such as media coverage, official notices, press releases, reports and publications referring to the project. No public statements should be made on the content of the project without prior written consent of the beneficiary stakeholder and the EBRD. Any presentation and reports should acknowledge the donor contribution of the donor including the insertion of the donor logos. The final report should detail the ways in which the donor's visibility requirements were adhered to. Terms of Reference Page 6 of 6