AVGR.L Regulatory News (AVGR)

PRACTICE STATEMENT LETTER

NOT FOR DISTRIBUTION IN OR INTO OR TO ANY PERSON LOCATED OR RESIDENT IN THE UNITED STATES, ITS TERRITORIES AND POSSESSIONS OR TO ANY U.S. PERSON (AS DEFINED IN REGULATION S UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED).

From: Avangardco Investments Public Limited

To: The Scheme Creditors (as defined below)

17 September 2015

Dear Sir/Madam

PROPOSED SCHEME OF ARRANGEMENT IN RELATION TO AVANGARDCO INVESTMENTS PUBLIC LIMITED (THE "COMPANY") UNDER PART 26 OF THE COMPANIES ACT 2006

1. PURPOSE OF THIS LETTER

1.1 You are being contacted as the Company believes that you are, or may be, a holder (the "Noteholder") of its US$ 200 million 10% notes due 29 October 2015 (the "Maturity Date") (ISIN: XS0553088708) (the "Notes") which were issued by the Company pursuant to a trust deed dated 29 October 2010 (the "Trust Deed") and of which US$ 200 million aggregate principal amount are currently outstanding. A person who is a Noteholder will be a scheme creditor for the purpose of the Scheme (as defined below) (a "Scheme Creditor"). The Notes benefit from suretyships provided by a number of Ukrainian operating subsidiaries of the Company as listed at Schedule 1 to this letter (together, the "Sureties").

1.2 This letter is being sent to Scheme Creditors via Euroclear Bank S.A./N.V. and Clearstream Banking, société anonyme (the "Clearing Systems"). In addition, an electronic copy of this letter shall also be made available to all Scheme Creditors by D.F. King Limited (in its capacity as information agent under the Scheme, the "Information Agent") at http://sites.dfkingltd.com/avangard (the "Scheme Website") and will be generally available for inspection at the offices of the Information Agent at the address set out in paragraph 13 below.

1.3 In the event that you have assigned, sold or otherwise transferred your interest in the Notes or intend to do so in the future, you are requested to forward a copy of this letter to the person or persons to whom you have assigned, sold or otherwise transferred your interest in the Notes.

1.4 In accordance with the practice statement issued by the High Court of Justice of England and Wales (the "Court") in its Practice Statement issued on 15 April 2002 (the "Practice Statement"), the purpose of this letter is to inform you of:

(a) the objective that the Scheme is designed to achieve;

(b) the Company's intention formally to propose the Scheme to Noteholders;

(c) the Company's intention to apply to the Court to seek an order convening a meeting of the Scheme Creditors of the Company for the purpose of considering and, if thought fit, approving the Scheme; and

(d) the Company's position as to the jurisdiction of the Court in relation to the Scheme;

(e) the composition of the meeting of Scheme Creditors that the Company proposes to convene for the purposes of voting on the Scheme.

1.5 Terms not defined in this letter shall have the meaning given to them in the terms and conditions of the Notes.

2. restructuring proposal

2.1 The Company intends to implement a restructuring proposal (the "Restructuring Proposal") which will, amongst other matters, provide for:

(a) an extension of the maturity date of the Notes from 29 October 2015 to 29 October 2018 (the "New Maturity Date");

(b) redemption of principal on the New Maturity Date;

(c) a coupon of 10% payable semi-annually in arrears on 29 April and 29 October of each year, commencing 29 April 2016, but subject to the following payment in kind ("PIK") and cash payment provisions:

(d) the 5% interest payable on 29 October 2015 (representing the semi-annual payment of the existing 10% coupon) to be paid as follows: (i) 2% to be paid in cash on 29 October 2015 as a regular coupon payment by the Paying Agent (the "2% October 2015 Cash Coupon") and (ii) 3% to be paid as PIK on 29 October 2015 (the "3% October 2015 PIK Coupon");

(e) The covenants set forth in Condition 5 (Covenants) shall be amended so that the following new covenants shall apply:

(f) all sureties under the US$500 million 10.875% notes due 26 March 2018 issued by ULF (the "ULF 2018 Notes") that are subsidiaries of the Company but which are not Sureties to be added as Sureties;

(g) prohibition on the creation of new Liens over Group assets to secure Financial Indebtedness (as such terms are defined in the terms and conditions of the Notes) and, for the avoidance of doubt, existing Liens shall be permitted to remain in place; and

(h) quorum and voting requirements for 'Basic Term Modifications' in respect of the Notes to be 75% and 75%, respectively,

in each case as set out in and in accordance with the Scheme Documentation (as defined below) and the Companies Act 2006.

2.2 In addition to the above, Scheme Creditors which, following the procedure set out in the Scheme Documentation (as defined below), validly instruct the Information Agent to vote in favour of the Scheme at the Creditors' Meeting by not later than 5 p.m. (London time) on 15 October 2015 (the "Early Instruction Deadline") and accede to the Lock-up Agreement (as defined below) (see paragraph 10 of this letter for more details), will be entitled to receive an early instruction fee of 2.5% of the outstanding principal amount of the Notes beneficially owned by that Scheme Creditor voted in favour (the "Early Instruction Fee"). All Scheme Creditors that validly vote in favour of the Scheme after the Early Instruction Deadline but not later than 5 p.m. (London time) on 20 October 2015 (the "Instruction Deadline") and sign a Lock-up Agreement acting by the Company (see paragraph 10 of this letter for more details) will receive a late instruction fee of 0.5% of the outstanding principal amount of the Notes beneficially owned by that Scheme Creditor voted in favour (the "Late Instruction Fee"). For the avoidance of doubt, if the Scheme is sanctioned and consummated, all Noteholders will also receive the 2% October 2015 Coupon in cash as a regular coupon payment by the Paying Agent and the 3% October 2015 PIK Coupon as PIK on 29 October 2015.

2.3 Scheme Creditors should observe any deadlines set by any intermediaries or Clearing Systems through which they hold interests in the Notes to ensure that any voting instructions given by them are taken into account at the Creditors' Meeting for the purposes of the Scheme. Following receipt of the explanatory statement, Scheme Creditors are strongly urged to communicate with their relevant account holder or intermediary as soon as possible to ensure they are aware of the explanatory statement and the process and timetable set out therein. Any Scheme Creditor whose Notes are held on its behalf by a broker, dealer, bank, custodian, trust company or other nominee must contact such entity if they wish to participate in the Scheme. None of the Company, the Information Agent or the Trustee (nor any person related to such entity) makes any recommendation as to whether or not Scheme Creditors should participate in the Scheme.

3. Proposed Scheme

3.1 The Company is proposing to enter into a scheme of arrangement (the "Scheme") with the Scheme Creditors under Part 26 of the Companies Act 2006 in order to implement the Restructuring Proposal. The Company intends to apply to the Court for an order granting the Company certain directions in relation to the Scheme, including permission to convene a meeting of the Scheme Creditors (the "Creditors' Meeting") at a hearing (the "Convening Hearing"), currently scheduled for 24 September 2015 in the Companies Court, Royal Courts of Justice, Rolls Building, Fetter Lane, London EC4A 1NL.

3.2 Scheme Creditors will be informed of any change to the date on which the Convening Hearing will take place via the Clearing Systems and the London Stock Exchange (and this information will also be available from the Information Agent via the Scheme Website).

4. BACKGROUND tO AND REASONS FOR THE SCHEME

4.1 ULF is the largest shareholder of the Company, holding 2,174,825 shares in the Company (34.1%) as at 30 June 2015. ULF is a leading agricultural producer that sells its products both domestically and internationally. It is the largest Ukrainian vertically integrated agricultural holding company, managing 654 thousand hectares of highly fertile black soil, which is the largest stock of black soil in Ukraine and the eighth largest in the world. The Company and ULF are ultimately owned by a sole shareholder, Oleg Bakhmatyuk. The Company is the holding company of direct and indirect Ukrainian subsidiaries which operate the business of the Company. The Company and its direct and indirect subsidiaries form a group of companies (the "Group").

4.2 The Company is one of the leading agricultural companies in Ukraine, focussing on the production of shell eggs and egg products. The Company has a market share of 36% of all industrial shell eggs and 75% of all dry egg products produced in the Ukraine as at 30 June 2015. The Company's shell eggs and egg products are either sold for export or sold on a wholesale basis to domestic wholesale customers.

4.3 In 2010 the Company issued the Notes to repay existing indebtedness and for general corporate purposes including ongoing capital expenditure. The Notes are unsecured, unsubordinated and unconditional obligations of the Company ranking pari passu as between themselves. The Notes benefit from sureties provided by the Sureties.

4.4 Due to deteriorating micro-economic and macro-economic conditions, the Group is suffering from an acute shortage of liquidity (see paragraphs 4.5 and 4.6 below). As a result thereof, and following extensive discussions and deliberations, the directors of the Company believe that:

(a) without the implementation of the Restructuring Proposal the Company will be unable to repay the principal outstanding on the Notes in full on the Maturity Date, thereby triggering an event of default under the Notes; and

(b) the Scheme is the only viable way to implement the Restructuring Proposal prior to the Maturity Date.

Liquidity Position

4.5 The Group is suffering from an acute shortage of liquidity and expects this shortage to intensify out to at least 2017. The tables set out in the Liquidity Analysis Spreadsheet at Schedule 2 show the Group's estimated cash balance as at 31 December 2015 and 31 December 2016 and the various competing demands for such cash.

4.6 Even assuming the Scheme is implemented, based on conservative assumptions, the Group's cash balance will fall sharply over the next 18 months from US$ 52,175,000 as at 30 June 2015 to US$ 26,775,000 by 31 December 2015 and US$ 5,101,000 by 31 December 2016. To the extent the Ukrainian government introduces anticipated legislation to amend the current VAT treatment regime in the manner required by the International Monetary Fund, the Group's cash balance would fall further to US$ 20,588,000 by 31 December 2015 and US$ 3,794,000 by 31 December 2016. Anticipated revenues are based on a realistic assessment of the ongoing impact of (i) weak macro-economic conditions in Ukraine on domestic demand and prices for the Group's products and (ii) challenging prospects for exports as a result of expected continued military/political disruption in the Group's key export markets in the Middle East and increased competition from other Ukrainian exporters.

4.7 The Group's anticipated costs and other expenses are expected to be equal to approximately 90% of the Group's revenues out to 2017. The Group's ability to control its costs and expenses is limited as high domestic inflation has had, and is expected to continue to have a significant effect on the Group's general and distribution expenses and cost of sales, including on the price of the raw materials essential for its business, on its payroll expenses and on the utilities and third party services necessary for the operation of its business.

4.8 The Group's anticipated capital expenditure for 2H 2015 and 2016 is based on the continuation of the Group's existing maintenance and capital expenditure policy which has eliminated all capital expenditure except for essential maintenance activities as required to ensure the Group's production capacity (and, therefore, revenue) does not decline further. Anticipated working capital changes are based on the minimum level of working capital required to enable the Group to maintain its existing operations and gradually increase its population of laying hens in 2H 2015 and 2016, in accordance with the Group's strategy.

4.9 Interest and principal on the Group's indebtedness other than the Notes will also become due and payable during the remainder of 2015 and 2016. Any failure by the Group to make payments of interest and principal on its other indebtedness when due and payable may result in the acceleration of such indebtedness which, in turn, may trigger cross-defaults under the Notes and the ULF 2018 Notes.

4.10 Certain payment defaults have occurred under the following bank facilities under which the Company is a borrower or guarantor:

(a) a facility agreement related to a buyer credit facility of up to €23,677,285.98 dated 9 August 2013 among (i) the Company as borrower, and (ii) Intesa Sanpaolo S.p.A London Branch as lender, mandated lead arranger and agent (the "Intesa Facility");

(b) a credit agreement dated 27 March 2013 among (i) Public Joint Stock Company "Rise" as borrower, (ii) ULF and the Company as guarantors, (iii) Private Joint Stock Company "Rise-Maksymko" as obligor, (iv) Private Export Funding Corporation as lender, (v) Deutsche Bank AG, New York Branch as arranger and (vi) Export-Import Bank of the United States ("PEFCO Facility 1"); and

(c) a credit agreement dated 13 September 2013 among (i) Public Joint Stock Company "Rise" as borrower, (ii) ULF and the Company as guarantors, (iii) Private Joint Stock Company "Rise-Maksymko" as obligor, (iv) Private Export Funding Corporation as lender, (v) Atrafin LLC, DBA American trade & finance Co. as Arranger and (vi) Export-Import Bank of the United States ("PEFCO Facility 2" and together with PEFCO Facility 1, the "PEFCO Facilities").

4.11 Total indebtedness in an aggregate amount of US$40,859,242.89 is currently outstanding under PEFCO Facility 1 and principal in an aggregate amount of US$4,980,647.80 is currently overdue thereunder. Total indebtedness in an aggregate amount of US$17,405,042.31 is currently outstanding under PEFCO Facility 2 and principal in an aggregate amount of US$1,740,504.23 is currently overdue thereunder. Total indebtedness in an aggregate amount of €21,468,495.2 is currently outstanding under the INTESA Facility and prior to the payment of all overdue amounts thereunder in full on 16 September 2015, principal in an aggregate amount of €536,178.23 was overdue thereunder. The Company is currently in discussions with the lenders under the PEFCO Facilities with a view to extending the term of the PEFCO Facilities.

4.12 Such non-payment of amounts under the PEFCO Facilities and the Intesa Facility has triggered events of default under Condition 11.1(e)(i) of the Notes. Consequently, the Company has requested in the Scheme that holders of Notes waive any event of default that has occurred or may occur under Condition 11.1(e)(i) of the Notes that is directly attributable to a payment default under the PEFCO Facilities or the Intesa Facility, provided that such waiver shall terminate upon the acceleration prior to its expressed maturity or other demand for payment of any indebtedness for money borrowed by (or guaranteed or covered by a suretyship of) the Company or any of its restricted subsidiaries (the "Waiver"). If the Scheme is sanctioned and becomes effective, the Waiver shall become binding on all holders of Notes. The Notes have not been accelerated.

4.13 The Company understands that non-payment of amounts of interest and/or principal when due and payable has also occurred under certain credit facilities under which ULF (or its restricted subsidiaries) is a borrower, guarantor and/or surety and that, as a result of such payment defaults, events of default have occurred and are continuing under Condition 10(c)(i) of the ULF 2018 Notes. The Company and certain of its restricted subsidiaries are guarantors and sureties under the ULF 2018 Notes and, therefore, any acceleration thereof would trigger an event of default under Condition 11.1(e)(ii) of the Notes. The ULF 2018 Notes have not been accelerated and no request is made in the Scheme to waive any event of default that may occur as a result of any acceleration of the ULF 2018 Notes.

4.14 The Group is currently in discussions with all lenders under the defaulted bank facilities regarding the obtainment of waivers. It is expected that such waivers will be received in due course and that none of the facilities will be accelerated. This situation will be different on the occurrence of a payment default on the Maturity Date of the Notes in the absence of the Scheme. In such circumstances, the consequences set out in paragraph 4.22 to 4.26 of this letter will occur.

4.15 The Group, therefore, is seeking to restructure its other indebtedness, but there can be no guarantee it will be successful and the completion of such restructuring will in any event be conditional on the restructuring of the Notes by way of the Scheme.

Key Factors Affecting Liquidity

4.16 The Group's financial and operating performance has deteriorated significantly since the third quarter of 2014, which has adversely affected its liquidity position. In the six months ended 30 June 2015, shell egg production and sales declined by 49% and 29%, respectively, and dry egg products production and sales declined by 75% and 54%, respectively, in each case, compared to the six months ended 30 June 2014. Average shell egg sales prices (in US$ terms) and average egg product sales fell by 24% and 19% across the same periods. Accordingly, in the six months ended 30 June 2015, revenue decreased by approximately 53.8%, from US$ 262.7 million to US$ 121.4 million and EBITDA decreased by approximately 190.9%, from US$ 108.0 million to US$ (98.2) million, in each case, compared to the six months ended 30 June 2014. Net loss for the six month period ended 30 June 2015 was US$ 152.4 million. The Company's audited financial statements from the years ending 2012, 2013 and 2014 and the financial results for the first half of 2015 are available on the Scheme Website.

4.17 This deterioration in financial and operating performance can primarily be attributed to the following factors:

Ukrainian Macro-economic Conditions

(a) All of the Group's assets and operations are based in, and approximately 88% of its sales of shell eggs and approximately 64% of its revenues are generated in Ukraine. Consequently, the Group's operations and financial results have been, and continue to be, materially adversely affected by deteriorating Ukrainian macro-economic conditions in 2014 and 2015.

(b) The annexation of Crimea and the ongoing military conflict in the Donetsk and Lugansk regions have adversely impacted, and continue to adversely impact, the Ukrainian government's tax base, resulted in extensive seizures and expropriations of private- and state-owned property and assets and have materially disrupted internal markets in Ukraine. The resultant deterioration of relations with the Russian Federation has resulted in the imposition of reciprocal trade and other sanctions and has otherwise inhibited trade with Ukraine's historic largest trading partner. The Russian Federation has periodically threatened to cut off gas supplies to Ukraine (and has done so on at least one occasion) and Gazprom has recently filed a US$ 29.2 billion claim against the Ukrainian state oil and gas company, Naftogaz, asserting non-payment by Naftogaz for historic gas supplies. As a result of the accumulation of acute economic, political and military pressure, the Ukrainian economy has experienced substantial capital outflows since 2014. This has significantly weakened the Ukrainian banking system which is increasingly reliant on support from the National Bank of Ukraine. The Ukrainian government, suffering from a sharp decline in taxation revenue receipts and the continued incurrence of substantial expenditure in connection with the ongoing military operations in Donetsk and Lugansk, is now reliant on foreign financial assistance and is currently in restructuring discussions with creditors to seek to avoid a sovereign default on its capital markets instruments.

(c) In the second quarter of 2015, Ukrainian GDP fell by approximately 14.7% from UAH 375,903 million to UAH 320,645 million and industrial output for the six month period ended 30 June 2015 fell by approximately 20.5%, in each case compared to the corresponding period of 2014, the Hryvnia depreciated by 43.8% against the US dollar from UAH 11.82 to US$ 1.00 as at 30 June 2014 to UAH 21.02 to US$ 1.00 as at 30 June 2015 and international reserves fell by 40% from US$ 17,083.3 million as at 30 June 2014 to US$ 10,263.7 million as at 30 June 2015.

Annexation of Crimea and Military Conflict in Eastern Ukraine 

(d) The annexation of Crimea and the ongoing military conflict in the Donetsk and Lugansk regions (together, the "Affected Regions") have significantly disrupted the Group's business. In aggregate, the Group's poultry farms located in or near to the Affected Regions accounted for 26.7% of its total egg production in 2013. Since the second half of 2014, the Group has been forced to suspend or significantly reduce production at, or otherwise no longer control operations at, four poultry farms which are located in or near to the Affected Regions, which facilities accounted for 6.2% of its total egg production and maintained 9.9% of its laying hen population in 2013, and it has otherwise been gradually reducing production at other poultry farms in or near to the Affected Regions, which accounted in aggregate for approximately 20.5% of its total egg production in 2013. Further, the Group has effectively ceased all sales of its products in the Affected Regions, which accounted in aggregate for approximately 20.5% of total revenue in 2013. The Group's ability to maintain its assets and resume its production operations and sales in the Affected Regions in the future will be entirely dependent on political and military developments over which it has no control.

Disruption of Key Export Markets

(e) The Group's exports of shell eggs declined by 32.8% and dry egg products by 59.8% in the six month period ended 30 June 2015 compared to the six month period ended 30 June 2014, primarily as a result of disruptions in its key export markets in the Middle East. Ongoing military activity and political uncertainty in this region has adversely affected demand for the Group's products and impaired its supply chain and logistics capabilities in the region. Consequently, the Group has been unable to increase exports in order to generate foreign currency denominated revenue and compensate for falling domestic demand.

4.18 Such deteriorating economic conditions have had the following impact on the Company and the Group: 

(a) Approximately 64% of the Group's revenue is generated in Hryvnia but approximately 99% of its borrowing are denominated in US dollars (including the Notes) and Euro and the Group's financial statements are presented in US dollars. Therefore, the sharp devaluation of the Hryvnia has had a significant adverse impact on the Group's US dollar revenue and, thus, on the Group's ability to repay its foreign currency borrowing, including the Notes.

(b) The Group is unable to refinance its indebtedness, including the Notes, either domestically or in the international financial markets. The Ukrainian banking system is chronically undercapitalised and the ability of Ukrainian banks to finance foreign currency lending is further constrained by banking and currency control restrictions imposed by the National Bank of Ukraine. The international financial markets are effectively closed to Ukrainian companies as a result of the ongoing economic and political turmoil in Ukraine.

(c) Internal demand for the consumer products has declined and consumers have become more cost sensitive. Consumer spending in Ukraine generally has fallen in response to sharp decreases in average real household income and household production of shell eggs has increased in response thereto. These trends continue to act to suppress demand and, therefore, market prices for the Group's products relative to inflation.

4.19 In ordinary circumstances, the Company would manage its financial indebtedness through a combination of earnings and refinancings through the international capital and debt markets. However, the Company is currently unable to raise capital in the international capital and debt markets due to the current situation in Ukraine and as a result, is unable to redeem the Notes on the Maturity Date, absent the Scheme.

4.20 The Company therefore intends to use the Scheme to effect the rescheduling of the maturity of the Notes in anticipation that in due course the international capital and debt markets will reopen for Ukrainian based borrower groups and that macro-economic conditions will improve and support the Group's operations.

4.21 The Company has the support of approximately 36% of its Noteholders for the Restructuring Proposal but has not obtained consent from Noteholders representing 90% of the outstanding aggregate principal amount of the Notes as is required under the terms and conditions of the Notes to reschedule the maturity of the Notes.

4.22 Absent the Scheme, the Company will be unable to repay the principal outstanding on the Notes in full on the Maturity Date. Any failure to repay principal in respect of the Notes on the Maturity Date will trigger an event of default under the Notes. This will in turn trigger cross-defaults under the ULF 2018 Notes and certain other indebtedness of the Group and ULF.

4.23 This is likely to result in some or all of the Group's (and ULF's) indebtedness being accelerated and/or the Company and/or other Group companies being placed into insolvency proceedings. Any such proceedings would be lengthy, expensive and uncertain and there can be no assurance that Scheme Creditors, who would have to compete with other creditors of the Group (including secured creditors), would recover any of the value of their Notes.

4.24 The ULF 2018 Notes benefit from suretyships provided by a majority of the Sureties. As the creditors of the ULF 2018 Notes share in the value of the guarantees with the Scheme Creditors, this would result in a lower recovery for the Scheme Creditors in the event of a default under the Notes. In the case of a liquidation process being initiated in respect of the Company, loans that are secured by pledges over the Group's assets would be repaid on the first-priority basis.

4.25 It is likely that if there is an event of default under the Notes the Company and some or all of the Sureties will enter into a voluntary or involuntary insolvency procedure in their relevant jurisdictions. In these circumstances, the directors believe that there will be a significant destruction of value within those companies. For example, it would be extremely difficult to realise the full value of the Sureties and their respective assets through a Ukrainian insolvency procedure due to the time and cost entailed by such a procedure as well as the uncertain economic and geopolitical climate in which it would be undertaken. The ability to sell the Sureties' assets would be extremely limited due to the absence of any liquidity in the Ukrainian market.

4.26 The likelihood and quantum of recovery by Scheme Creditors in such insolvency procedures would, therefore, likely be materially less, when compared to their entitlements pursuant to the Restructuring Proposal effected by way of the Scheme.

4.27 Given the current financial position of the Group and the difficulty of obtaining the level of consent required to reschedule the maturity of the Notes under the terms and conditions of the Notes, the Company considers it appropriate to implement the Restructuring Proposal via the Scheme.

4.28 Assuming the Restructuring Proposal is effected pursuant to the Scheme, the Company intends to pursue the following strategy:

(a) Regain the Group's leading market position in Ukraine by maintaining and increasing operations in all areas of Ukraine outside the Affected Regions.

(b) Increase the percentage of high margins sales of the Group's products on domestic markets, including sales to retail chains and sales of "Kvochka"-branded products and increasing exports of shell eggs and dry egg products to sub-Saharan Africa, Asia and the European Union.

(c) Improve operational efficiency and reduce associated operating costs and expenses.

(d) Maintain a high level of biosecurity standards by employing a broad range of safety measures in line with best international practices.

5. THE SCHEME CREDITORS WILL BE AFFECTED BY THE SCHEME

5.1 If it becomes effective, all Scheme Creditors (including those who do not vote in favour of the Scheme) will be bound by the terms of the Scheme, along with the Company and various other entities which will be required to undertake to be bound by the Scheme. The Trustee and the Common Depositary are also scheme creditors but have confirmed that they will not participate and as such, will not be considered as Scheme Creditors. 

5.2 It is envisaged that the Sureties will enter into agreements or other arrangements in order to give effect to the Restructuring Proposal and that the entry into such documentation by such entities will be a condition precedent to the effectiveness of the Restructuring Proposal.

5.3 The background to, and terms of, the Restructuring Proposal and the Scheme will be described further in the explanatory statement which will be made available to the Scheme Creditors on the Scheme Website following the Convening Hearing provided that the Court grants its permission to the Company to convene the Creditors' Meeting.

6. THE OBJECTIVE OF THE SCHEME

6.1 The primary objective of the Scheme is to implement the Restructuring Proposal in order to ensure the Company and Group have a level of debt that is serviceable going forward and to avoid the default scenario as described above.

6.2 If the Company is unable to effect the Restructuring Proposal there is a real prospect that the Group will need to suspend part or all of its operations. In that event the Company considers it likely either that it would need to seek formal protective action from its creditors through the commencement of an insolvency process in Cyprus or that one or more of its creditors would commence insolvency proceedings against it and several other Group entities in the relevant jurisdictions.

6.3 The Company considers that if it is unable to reschedule the maturity of the Notes and if, as a result, it commences insolvency proceedings, there is a substantial risk that the Company would not be able to repay its creditors (including the Scheme Creditors) in full and the quantum and timing of any distributions to its creditors is very uncertain. If the Company is successful in implementing the Restructuring Proposal the Company anticipates that it will be able to repay its creditors in full following the reopening of the international capital and debt markets to Ukrainian based borrower groups and the improvement of macro-economic conditions in both Ukraine and the Group's key export markets.

6.4 In the circumstances, the Company is of the view that the Scheme is the most effective method of implementing the Restructuring Proposal for the benefit of the Scheme Creditors.

7. SCHEME CREDITORS TO FORM A SINGLE CLASS

7.1 Under the provisions of Part 26 of the Companies Act 2006, for the Scheme to become effective:

(a) it must be approved by a majority in number, representing at least 75 per cent. in value, of each class of Scheme Creditors present and voting (either in person or by proxy) at the relevant class meeting ordered to be summoned by the Court;

(b) it must be sanctioned by the Court at a subsequent court hearing; and

(c) a copy of the order sanctioning the Scheme must be delivered to the Registrar of Companies.

7.2 Under the terms of the Practice Statement it is the responsibility of the Company to formulate the class or classes of creditors for the purpose of convening meetings to consider and, if thought fit, approve the Scheme. Meetings must be properly constituted so that each meeting consists of creditors whose rights against the Company are not so dissimilar as to make it impossible for them to consult together with a view to their common interest.

7.3 The Company has considered the present rights of the Scheme Creditors against the Company and the rights of the Scheme Creditors under the proposed Scheme and has concluded that it is appropriate that the Scheme Creditors vote in a single class meeting.

7.4 As described above, the proposed Scheme applies to all of the Scheme Creditors. Each Scheme Creditor holds its portion of the Notes issued on identical terms pursuant to the Trust Deed and therefore each Scheme Creditor has the same rights against the Company. Further, if the proposed Scheme is approved, each Scheme Creditor will receive the same rights under the Scheme and will be treated in the same way. 

7.5 Insofar as the Early Instruction Fee and the Late Instruction Fee are concerned, the possibility of receiving such fees is open equally to all Scheme Creditors.

7.6 On this basis, the Company is of the view that the rights of all the Scheme Creditors are sufficiently similar so as to make it possible for them to consult together with a view to their common interest.

7.7 Accordingly, it is proposed that a single meeting of the Scheme Creditors is convened for the purposes of considering and, if the Scheme Creditors think fit, approving the Scheme.

8. JURISDICTION

8.1 A practice has developed under which the Court will consider at the Convening Hearing whether it has jurisdiction under the Companies Act 2006 to sanction the Scheme. It is therefore expected that the Court will address this point at the Convening Hearing. 

8.2 The Notes and the Trust Deed are, and have at all times been, governed by English Law. Disputes arising out of or in relation thereto must be referred to LCIA arbitration with a seat of arbitration in London, and the Company and the Sureties have irrevocably submitted to the exclusive jurisdiction of the English Court.

8.3 The Notes were admitted to the official list of the UK Listing Authority of the London Stock Exchange on 1 November 2010 and remain so admitted on the date hereof. Several of the largest Scheme Creditors are themselves also domiciled in England and Wales within the meaning of the recast Judgments Regulation. These Scheme Creditors hold Notes amounting to approximately 15% by value of the overall Notes.

8.4 The Company has dealt with and continues to deal with the Scheme Creditors through its professional advisers based in London. Latham & Watkins, the Company's legal advisers in relation to the Scheme, are based in London.

8.5 On this basis, the Company considers that the Court has jurisdiction to sanction the Scheme.

9. SCHEME CREDITOR ISSUES

9.1 As noted above, the Convening Hearing is expected to take place on 24 September 2015.

9.2 If you disagree with the Company's proposals regarding the convening of the Creditors' Meeting outlined above (including the proposed composition of the voting class), wish to raise any other issue in relation to the constitution of the Creditors' Meeting or any other matters that otherwise affect the conduct of the Creditors' Meeting, or disagree with the Company's conclusion that the Court has jurisdiction to sanction the Scheme, you should write to Latham & Watkins as soon as practicable using the contact details below, in advance of the Convening Hearing, setting out your concerns. In addition, you may attend before the Court at the Convening Hearing and make any representations you wish on that subject.

9.3 Please note that if the Scheme is approved at the Creditors' Meeting, it will still be possible for Scheme Creditors to raise objections on the question of class and jurisdiction (as well as other matters) at a subsequent court hearing to sanction the Scheme which is anticipated to be held on 26 October 2015. However, in that event, the Court is likely to expect Scheme Creditors to show good reason why they did not object to the constitution of the classes of Scheme Creditors and the jurisdiction of the Court at an earlier stage.

10. LOCK-UP

10.1 In September 2015, the Company entered into confidential discussions with certain Noteholders (the "Initial Locked-up Noteholders") in connection with the Restructuring Proposal. As a result of such discussions, as at the date of this Practice Statement Letter, Noteholders which together hold approximately 36% by value of the principal amount outstanding of the Notes have entered into a lock-up agreement with the Company, dated 17 September 2015 and available on the Scheme Website and the Company's website (the "Lock-up Agreement") by which the Initial Locked-up Noteholders have agreed to vote in favour of the Scheme.

10.2 To receive the Early Instruction Fee or Late Instruction Fee, Scheme Creditors must both accede to the Lock-up Agreement and submit instructions by the deadlines set out in paragraph 2.2 of this letter and in accordance with the voting instructions set out in the explanatory statement.

11. SCHEME WEBSITE

The Information Agent has set up the Scheme Website (http://sites.dfkingltd.com/avangard) to disseminate information about the Scheme and to facilitate the implementation of the Scheme. Scheme Creditors may download documents relating to the Scheme from the Scheme Website once they have registered on the Scheme Website.

12. NEXT STEPS

12.1 As noted above, we anticipate that the Convening Hearing will take place on 24 September 2015. Scheme Creditors will be notified in advance if there is a change to the proposed date. Shortly following the Convening Hearing, Scheme Creditors will be provided with certain documents in connection with the Scheme. The documents will be comprised of:

(a) a copy of the scheme of arrangement; and

(b) the explanatory statement required to be provided pursuant to section 897 of the Companies Act 2006 (which will include a notice setting out the relevant details for the Creditors' Meeting)

(together, the "Scheme Documentation").

12.2 The Scheme Documentation will be made available by the Information Agent to the Scheme Creditors via the Scheme Website.

12.3 Based on the current timetable, the Scheme Documentation will be uploaded to the Scheme Website and a notice relating to the same will be circulated to Scheme Creditors via the Clearing Systems and the London Stock Exchange on or around 24 September 2015.

12.4 Assuming that the Court orders that the Creditors' Meeting be convened by the Company, the proposed date on which the Creditors' Meeting will be held is 22 October 2015.

13. Contact Details and Further Information

If you have any questions in relation to this letter or the Scheme, please contact the Information Agent or the Company's legal advisers using the contact details below:

D.F. King Ltd. as the Information Agent 

Email: avangard@dfkingltd.com

Website: http://sites.dfkingltd.com/avangard  

In New York:

48 Wall Street, 22nd Floor

New York, New York 10005

United States

Telephone: +1 212 269 5550

Latham & Watkins (London) LLP, as the Company's legal advisers 

Email: John.Houghton@lw.com

Email: Marc.Hecht@lw.com

Yours faithfully,

_________________________

Authorised Signatory of the Company

cc:

BNY Mellon Corporate Trustee Services Limited

One Canada Square

London E14 5AL

United Kingdom

(the "Trustee")

SCHEDULE 1

SURETIES

PJSC Agrofirma "Avis"

LLC "Torgivelniy Budynok "Bohodukhivska Ptakhofabryka"

PJSC Chernivetska Ptakhofabryka

PJSC "Ptakhohospodarstvo "Chervonyi Prapor"

APP PJSC "Chornobaivske"

PJSC "Avangard"

ALLC "Donetska Ptakhofabryka"

SC "Gorodenkivska Ptakhofabryka" of PJSC "Avangard"

LLC "Imperovo Foods"

PSPC "Interbusiness"

SC "Rogatynska Ptakhofabryka" of PJSC "Avangard" 

SC Ptakhofabryka "Lozuvatska" of "Avangardco Investments Public Limited"

LLC PF "Volnovaska"

PJSC "Cross-P/F "Zorya"

SCHEDULE 2

LIQUIDITY ANALYSIS SPREADSHEET