Holders of $595mn worth of PrivatBank’s Eurobonds were wiped out on December 21 after the National Bank of Ukraine (NBU) converted their bonds into shares that were then sold to the Ukrainian Ministry of Finance for UAH1.
“Its done. The Eurobonds were converted to shares and added to the share capital of the bank,” head of research at Concorde Capital Alexander Paraschiy told bne Intellinews. “That increased the share capital to about UAH29bn. Then 100% of these shares were sold to the Ministry of Finance for a nominal UAH1… There is no official information on whether this capital increase was performed at the expense of holders of PrivatBank's Eurobonds maturing in 2018 at a total value of about UAH8.8bn. But most likely it was so. That means the full dilution of all of PrivatBank’s Eurobonds has already occurred."
Concorde sent out a note earlier on the options for the Eurobond investors that included the chilling line: "The recovery value is ZERO" on the bank's bonds.
PrivatBank’s newly appointed chairman and former Finance Minister Oleksandr Shlapak told journalists on December 22: "Eurobonds were included in the list of financial tools that were transferred to capital. It was the decision of the central bank," Shlaoak said. "I think that we jointly with the central bank would try to make arrangements with the bond holders. If nothing is reached, we will substantiate it in court."
Late on December 18, the Ukrainian government announced the nationalisation of the country's biggest lender by assets, PrivatBank, owned by oligarchs Ihor Kolomoisky and Hennady Boholyubov, after the National Bank of Ukraine (NBU) in early December found a UAH148bn ($5.6bn) hole in PrivatBank's balance sheet.
The decision will come as a shock to bondholders, some of whom have already hinted they may challenge the decision in court, according to bne IntelliNews sources. The bonds covenants have an option for accelerating the repayment of the bonds should the bank become insolvent, but the conversion has happened so fast "we have little understanding of how this could be enforced", Concorde said in a note.
“The bank is being nationalized according to Article 41.1 of the Deposit Guarantee System Law, which is likely negative for PrivatBank bondholders,” SP Advisors said in a note, referring to an article that gives the government the power to bail in bond holders.
Analysts say there is a chance bondholders can make a claim for the recovery of the notes in international courts as the deposit guarantee fund is not obliged by law to bail in Eurobond holders and, according to Privatbank, it was the National Bank of Ukraine that forced Privatbank to restructure its Eurobonds maturing now in January 2018. At the date of restructuring, the NBU was aware of all systemic problems of the bank (including huge capital gap and high probability of its nationalisation), “so, in our view, the regulator was not sincere with the bondholders last year [when the initial restructuring and recapitalisation deal was agreed]”, Concorde said in a note.
Using the highly unpopular bail-in approach is a legal first in Ukraine and the legal risks are unclear. Moreover, Eurobond holders will be miffed at being forced to take the loss when there is little confidence the NBU will be able to recover billions of dollars the bank made in loans to companies under the control of the bank's owners.
The NBU found a massive 97% of the banks loans have been made to shell and related party companies that are believed to be owned or controlled by the bank’s oligarch owners, as bne IntelliNews described in a cover feature in November. The hole in the balance bank's balance sheet is estimated at UAH148bn ($5.6bn). The NBU called the loans "fully non-performing" and says they should be 100% provisioned; prior to nationalisation the bank had provisions worth 10% of their total.
"The 100% provisioning is required as all the loans have no hard collateral, and all the related borrowers are empty shells," Concorde said in a note, and went on to place the blame for the capital gap mainly on the bank’s shareholders, which used the bank as a “vacuum cleaner “ as it’s locally called, or a financial entity that took deposits from households, and then lent the funds mostly to their own related businesses.
It also blamed the NBU for inefficient supervision and delaying the nationalisation for a year, as well as the bank's auditors, PWC, which failed to disclose the total absence of collateral and underestimated the share of related party loans at only 22%.
While nominally the finance ministry will make an attempt to recover these debts, its chances of success are very low, as the government has only paid lip service to the need to recover assets and cash stolen in the past by political insiders.
During his four years in office, ousted president Yanukovych is believed to have stolen between $7.5bn and $40bn, according to various estimates; none of that money has been recovered. This year the government said that it planned to confiscate $290mn of assets believed to have been stolen in 2016. So far they’ve recovered and returned to state budget just $5,683, though this is up from the $3,813 the government recovered in 2015, according to a report from corruption watchdog Transparency International in December.
Using the bank’s hryvnia-denominated retail deposits to fund its lending business, many of PrivatBank’s related party loans were made in hard currency to offshore shell companies set up by the bank’s owners, oligarchs Ihor Kolomoisky and Hennady Boholyubov, as bne IntelliNews reported.
It will be extremely difficult, if not impossible to recover these debts as another recent bne IntelliNews report described, exposing a mechanism whereby the owners siphoning off billions of euros of clients’ money by placing them with a handful of obscure Alpine banks; money which has since vanished prior to the December 19 cabinet announcement.
“The bottom line is Kolomoisky and his partners get to keep that cash they lent to themselves, whereas the bondholders who have lent real money to the bank lose everything,” says one Kyiv-based source.
This is the second time in a year that investors into Ukraine’s bonds have been punished by the state. The holders of $23bn worth of Ukrainian sovereign bonds were forced to accept a debt restructuring by then finance minister Natalia Jaresko in 2015. In that deal the maturities were pushed back by four years and bondholders were forced to take a 20% haircut and the face value reduced to $18bn. The interest rates on all the bonds were reset to 7.75%, just above the market rate at the time of the deal.
This deal could very well end up in court. The Eurobonds were issued by a UK-based SPV affiliated with PrivatBank. The NBU has reiterated its demand that the bank’s shareholders pay back the loans; however, the two oligarchs have not responded. The Kyiv Post reported that Kolomoisky’s private jet was reported leaving Ukraine on December 18 the day before the announcement. Kolomoisky has a home in Switzerland, where he spends a large amount of his time.
As for the bank, it is still operating after a single day’s halt in business. On December 21 it even sent out a press release claiming it had opened a large number of new accounts. National authorities said on December 19 that after the takeover they will contribute UAH116bn ($4.415bn) in state bonds to the bank’s equity, and plan to raise UAH32bn ($1.2bn) by converting related party loans and unsecured lending to the bank into its equity. At the initial stage, the government will increase the bank’s equity by UAH43bn ($1.64bn) via contribution of state bonds.
The end result looks like being that PrivatBank's Eurobond holders will lose their entire $595mn investment; the owners of the bank will keep the $5.6bn they lent to themselves; and the Ukrainian taxpayer will be on the hook for the billions of dollars the Ministry of Finance will be forced to inject into its capital to stop it from imploding.