Helping stomach their foreign clientele’s investments in risky, high-return Ukrainian bonds are Frenchmen Redwan Merouani and Alexis Stenbock-Fermor.
Their combined 23 years of local knowledge and experience has since January been servicing wealthy individuals with Swiss bank accounts through REM Advisors. With offices in Kyiv and Geneva, they offer double-digit returns in an emerging markets portfolio that is small by international standards. Roughly 50 percent of the few million dollars they manage is locked in Ukrainian government-backed or sovereign, quasi-sovereign and corporate bonds. Another 25 percent is in other Commonwealth of Independent States’ bonds like Russia and Kazakhstan, and the remainder is in Latin America.
“We have the Kyiv city bond maturing in 2015, Metinvest eurobond maturing in 2018…most of the bonds that we trade now were issued before the financial crisis of 2008-2009,” Merouani told the Kyiv Post at his office on Sept. 8.
Choices are made based on what both call “looking at a bond through the prism of the issuer’s willingness and capacity to pay.” It’s about striking a balance between yields – Metinvest’s 2018 yield was above 20 percent as of Sept. 16 – and capital gain.
“You could buy U.S. Treasury bonds, but you could buy emerging markets bonds. It’s risky, but over time it’s proven to be a very successful asset class,” said Merouani.
Factored into the riskiness of local bonds is the risk of continued war and political instability. “War risk means having no means to continue working,” the 55-year-old trader added, acknowledging that Rinat Akhmetov’s Metinvest is the group’s riskiest holding. “When the ceasefire (on Sept. 5) was announced, Ukrainian bonds basically jumped 5 (basis) points all across the curve, including sovereign bonds, that tells you most of the implied risk imbedded into those prices are linked directly with the war.”
Both of the Paris-born traders met each other in 2008 when they started trading in bonds on the sell and buy side.
Stenbock-Fermor, 45, who got “tired living in New York and wanting to come back to Europe” after spending six years at brokerages, arrived after six months after the 2004 Orange Revolution to join a growing sales team at Concorde Capital.
“I was happy to come to Ukraine, it was part of my roots,” he said referring to his great grandfather, Count Ivan Stenbok-Fermor, who was of Russian-Swedish nobility, and member of the third State Duma from Kherson Oblast. The fluent Russian speaker moved to Online Capital in 2007 to set up an international sales desk. He would meet Merouani a year later as the co-founder of Mars Capital, a hedge fund.
His older colleague’s first brush with Ukrainian bonds came in 2000 when Societe Generale sent the trader to fix an unpaid debt worth $25 million for John Deere machinery. He came every month for four months to meet with the finance minister eventually arranging a debt swap, receiving Ukrainian government bonds in return.
“I didn’t speak a word of Russian; I was a specialist in the Middle East and Africa given my Algerian background…I fell in love with the country; I felt the potential to such an extent that I bought an apartment as an investment at $600 per square meter which was amazing,” said Merouani.
He repeated the same feat the next year, this time for Credit Agricole, another French bank, in 2001 worth $35 million. Once at Mars Capital with $250 million under management, Marouani passed up the opportunity to buy Pravex Bank for $100 million in early 2005 from future Kyiv Mayor Leonid Chernovetsky.
“That was six times its equity. We didn’t do the deal,” he recalled. Three years later Italy’s Intesa Sanpaolo bought Pravex for $750 million. It now belongs to Ukrainian chemicals tycoon Dmytro Firtash who bought it for nearly $100 million in January.
In 2009, Merouani subsequently sold his shares in Mars to a Russian partner and joined Astrum Investment Management to advise CEO Maxim Blank, currently the first deputy head of the state’s railway monopoly Ukrzalyznytsia.
Building on their years of cultivating foreign client relationships and local contacts in government and corporate Ukraine, Stenbok-Fermor and Merouani two started REM Advisors in early 2014. The time was ripe, they say, especially after Greece, Spain and Italy needed bailouts starting in 2011.
“We started thinking of investing in the Ukrainian corporate bond market…keeping in mind you’ve got to give money to people who live there (we) and who know how to trade them. That’s how the idea came. We say okay, we are willing to give you a small portion of our holdings in that particular asset class,” said Merouani.
Both have a contrarian investment attitude. During the interview, Merouani cited an old stock market proverb: “Buy when people are killing each other on the street, and sell when people are kissing each other on the street.” But as long as Ukraine keeps meeting the International Monetary Fund’s conditions for the current $17 billion loan package, both feel their investments are secure.
“We all know that the IMF is backing the country and not only…the G7 countries are fully backing the country and we’re trying to take advantage of that,” said Merouani.
Kyiv Post editor Mark Rachkevych can be reached at [email protected].
