The government’s takeover of PrivatBank may have bought a brief period of stability to Ukraine’s financial sector, but it also left a $595 million hole in the pockets of some investors.
The National Bank of Ukraine claims that the investors – who lost that collective sum after the state converted the bank’s eurobonds into share capital – are connected to PrivatBank’s former owner, the oligarch Igor Kolomoisky.
But the investors themselves say that they are not and that the central bank has treated them “carelessly” and “with disrespect” as they attempt to recoup losses in the hundreds of millions.
Frankfurt-based Commerzbank AG seized 17 million euros from PrivatBank’s correspondent accounts in the bank, according to a document leaked on Feb. 2. The bank declined to comment.
The question is: are the investors really just fronts for Kolomoisky, set up as a mechanism to support PrivatBank? Or has the national bank screwed over legitimate investors?
Inside buyers?
The $595 million in five-year bonds came in three issues – two in 2013 and one in 2016.
After the government took over PrivatBank on Dec. 18 in a move to prevent the bank’s precarious pecuniary position from endangering the country’s financial system, it converted the $595 million worth of bonds into the bank’s share capital.
The NBU argued it had determined that the majority of the buyers were related parties and that the entire debt issue was a complicated scheme to raise more money to fund the bank.
Suspicion that PrivatBank had rigged the bond sales, which occurred in 2013 and 2016, clouded the deal almost as soon as it occurred. A UK-based firm, linked to PrivatBank according to its disclosures to the British government, issued the bonds.
Kyivans wait in line at a PrivatBank ATM on Dec. 19, one day after nationalization. The government says the bank collapsed because of rampant insider lending to borrowers close to former owner Ihor Kolomoisky. The bailout may cost taxpayers $5.6 billion. (Volodymyr Petrov)
At the time, many saw the bank as being a giant vacuum cleaner of money, sucking up Ukrainians’ deposits to finance Kolomoisky’s operations in ferroalloys, media, and oil.
“There was a lot of skepticism to how the deal was done, because there were a lot of inside buyers,” said Nick Piazza, the CEO of Kyiv-based investment banking firm SP Advisors.
But the eurobond holders themselves deny that they were Kolomoisky’s pawns.
Who got nothing
After the government took over PrivatBank, the bondholders formed a committee, hiring international law firm Dechert to represent them.
Not all of the debt holders are known. But some names have already emerged.
Funds Pala assets, Pioneer Investments, and First Geneva Capital Partners are all on the committee.
All of the above declined to comment on the record for this story.
The firms argue that they are legitimate foreign investors who lost hundreds of millions after the nationalization, without the NBU even attempting to negotiate the issue.
Alexander Paraschiy, an analyst at Concorde Capital, wrote that the independent bondholders “appeared to be the only creditors that got zero from their contribution to the bank.”
“All the other creditors will recover 100 percent, including the bank’s depositors, or even more, as related parties took in much more in the form of loans from the bank than they lost during the bail-in,” he wrote.
Oleksandr Zavadetsky, a former NBU official who was the first chief of the bank’s related-party monitoring unit, criticized the bank’s handling of the situation.
“There should be an opportunity to appeal against any decision on who is a related party,” Zavadetsky said, adding that the bank went ahead with nationalization while “limiting” that opportunity.
Cargill cuts deal?
Further aggravating many of the eurobond holders is the case of American agricultural and financial services conglomerate Cargill.
The Minnesota-based trader – America’s largest private corporation – has been making and selling sunflower seed oil in Ukraine since 1991. In recent years, the company’s financial services division has expanded into the Ukrainian banking sector.
After PrivatBank was nationalized, Cargill found itself in a similar situation as the eurobond holders – the government had bailed in PrivatBank’s debts to Cargill, causing the company to lose around $70 million.
But Cargill managed to squeeze itself out of the loss. On Jan. 13, the company sent a letter to PrivatBank CEO Oleksandr Shlapak, the NBU, and the U. S. Ambassador, requesting “clarification” on whether the bank would return the money.
By that point, since the debts had been bailed-in already, Cargill’s letter appears to have been more of a shot across the bow than a straightforward inquiry.
Journalist Oleksandr Dubinsky, of the Kolomoisky-owned 1+1 Media Group, published a leaked copy of Cargill’s letter Jan. 25. On Jan. 26, PrivatBank issued a statement saying it had “restored” $70 million in the bank’s accounts, attributing the conflict to a “technical issue.”
Cargill did not reply to an emailed request and a telephoned request for comment.
The eurobond holders, however, are using Cargill’s case to argue that the NBU should pay them back as well.
“Without the leaked letter we wouldn’t have known about this,” said one eurobond holder, who wished to remain anonymous, citing a lack of authorization to speak publicly about the mater.
“We demand our bonds as well.”
Bad assets
The eurobond holders have threatened to file an arbitration lawsuit against the NBU in London, though they say that they will not pursue other paths of litigation.
A lawyer for the bondholders, Victor Moroz of law firm Suprema Lex, told the Kyiv Post on Jan. 26 that he would seek to freeze PrivatBank’s correspondent accounts over the matter. Commerzbank in Germany froze Euro 17 million in PrivatBank cash on Feb. 2.
In response to the case, NBU Governor Valeriya Gontareva said the bank would defend its position in court.
“They should ask Mr. Kolomoisky where the money came from,” she said on Jan. 26.
The NBU has also said that the government was forced to bail-in the bonds by Ukrainian law.
Oleksandr Savchenko, a former EBRD Ukraine country director and the current rector of the Kyiv International Institute of Business, pointed out that the country’s history of eurobond issues leaves a lot of be desired.
“In the past, there have been eurobond issues where top officials were most of the holders,” Savchenko said. “It’s possible that all this is some sort of political strategy.”
Dechert, the law firm representing the bondholders, recently sent a letter to the Ukrainian government. The lawyers argue that since the government recognizes the Cargill bail-in as “invalid… there is and can be no reason in law for a different and unequal treatment” of the eurobonds.
But Eavex Capital analyst Dmitry Churin, argue that there’s no reason to feel sorry for the bondholders, who had every opportunity for months before the bank’s nationalization to pull out. Information about insider lending at the bank had been known on the Ukrainian market for years before the nationalization.
“I do not see how the bondholders can blame regulators,” Churin told the Kyiv Post. “It’s the bondholders who invested in bad assets.”
Correction: This story has been updated to correct the name of the Ukrainian bondholder attorney to Victor Moroz and to include the name of his law firm.
