At this time of year, the travel media entice us with articles about little known holiday locales - undiscovered islands, secluded villages and forgotten cities.

All beckon holidaymakers with the promise of charm, authenticity, and most of all, real value for money. They are holiday hidden gems. As investors in non-performing loans (NPLs) also scour the globe seeking new locales which offer real value for money, Ukraine may prove to be an NPL investment hidden gem.

In the adjacent jurisdictions of Central and Eastern Europe (CEE) and South Eastern Europe (SEE), the banking sector’s NPL ratios range from an estimated low of 3.5 per cent for Austria to an estimated high of 26.7 per cent for Bulgaria, with an estimated combined average for CEE, SEE and the Baltics of 5.7 per cent, according to a 2015 study by the World Bank. The relatively low NPL ratios mean less assets for sale, less price flexibility and less yield. Investing in Austrian NPLs is a bit like vacationing in London … pleasant enough, but long queues and no bargains.

Ukraine’s banking sector, however, has a jaw-dropping NPL ratio of 40 per cent as announced in April 2016 by the Deputy Governor of the National Bank of Ukraine (NBU). Even by the more conservative estimates of the World Bank, Ukraine’s banking sector has an NPL ratio in excess of 28 per cent. Moreover, according to the NBU, over 70 per cent of Ukraine’s banks are being restructured, consolidated and deleveraged. Such activity and relatively high NPL ratio mean more assets for sale, more price flexibility and higher yield.

But does Ukraine offer a legitimate investment opportunity or simply an immeasurable risk? Is investing in Ukrainian NPLs a bit like vacationing on the lip of a lava spewing volcano? Untrammelled for sure, but likely to leave you scorched.

Ukraine’s banking sector has long been plagued by corruption and mismanagement, as well as the more recent economic repercussions of a revolution, an annexation by Russia of Crimea, and separatist rebellions. Nevertheless, in compliance with the International Monetary Fund and working with the Vienna Initiative, the Ukrainian Government has taken, and continues to take, certain incremental legal and regulatory measures to steady the economy and rehabilitate the banking sector. Several of the recent measures have directly facilitated investment in NPLs.

With effect from 11 January 2016, the NBU implemented Resolution No. 996, which repealed a prohibition on the transfer of cross-border loans to Ukrainian borrowers denominated in foreign currency. This prohibition had been in effect since 20 August 2015, as a crisis measure following the devaluation of Ukraine’s Hryvnia, and had suspended all trading in the Ukrainian secondary loan market relating to cross-border loans denominated in foreign currency. Resolution No. 996 now permits such cross-border loan transfers.

On 15 July 2016, Ukraine’s President Poroshenko formally adopted Law No. 3555 on Financial Restructuring, which addresses corporate financial restructuring. Amongst other innovations, the Law enables creditors and debtors to negotiate out-of-court agreements, corporate management to be replaced and corporate governance to be overhauled, and loans to be amended or extended. The Law is intended to expedite and streamline corporate financial restructuring by empowering creditors and reducing the influence of third parties.

Finally, 2016 saw the introduction of several amendments to existing tax legislation, initiating what will be an ongoing reform of the Ukrainian Tax Code, which is expected amongst other things, to grant preferential tax treatment for corporate write-offs.

With a population of 42 million, exceeding both the 38 million population of Poland and the 29 million aggregate populations of Romania and Hungary, Ukraine certainly represents a significant market. Polish and other CEE/SEE regional asset managers have expanded into Ukraine to provide essential servicing platforms. A number of Austrian financial institutions have already completed successful NPL transactions in 2016 with more in the pipeline.

Ukraine has ongoing financial sector reforms slated for 2016 through 2020 and intrepid NPL investors may indeed find an investment hidden gem in Ukraine. DLA Piper will continue to monitor the CEE and SEE NPL market and advise you of legal developments and commercial opportunities.