Mike Collier in Riga -
When the European Bank of Reconstruction and Development (EBRD) announced its latest investment in Central and Eastern Europe on April 7, it caused a few champagne corks to pop in the Latvian capital - even if, in these austere times, it was just the €3-a-bottle sickly sweet fizz that passes for "Rigas Å ampanietis."
By choosing to buy a quarter stake in Parex Bank for €84m (plus a €22m subordinated loan), the EBRD gave a huge boost to the credibility of both Parex and its new chairman, Nils Melngailis, who has managed to take the local bank from the edge of collapse to relative stability in just four months, even while the general economic situation in the embattled Baltic state has continued to deteriorate.
"It's important to have an institutional investor and someone who either directly or indirectly can help us get to funding, because the reason any potential buyers are having trouble considering acquisitions is because they're having funding problems themselves," Melngailis tells bne.
The EBRD's stated aim is to sell Parex back to the private sector in the future, but Melngailis is wary about naming a date. "A sale might take some time. Possibly this year, but our main goal is to stabilise the bank, which we have largely done. Now we have to get back to growth, and then we can look at some potential transactions in the autumn if the market recovers," he says.
Few could have envisaged such a turnaround when Melngailis was appointed in late 2008. Parex's rapid decline and fall from flashy bank for the nouveau riche to throwing itself on the charity of the state was a national embarrassment, seeming to symbolise everything that was wrong about Latvia's reckless "fat years," to use the words of former Prime Minister Aigars Kalvitis.
Even Melngailis must have had his doubts. He was a central figure in the abortive privatisation of Latvian mobile phone company LMT and ended up being made a scapegoat for the gadfly policies of the Latvian government at the time after setting up what looked like a credible deal.
But the EBRD investment is just the latest in a series of smaller, but no less significant, battles that Melngailis has won since taking over at Parex. Crucially, he managed to work out a new repayment plan for $1bn worth of syndicated loans that were due this year, winning an extra two years to pay up from a syndicate of 60 international lenders. You don't manage such a feat without first-class negotiation skills. Parex is attempting a similar feat with its bondholders and Melngailis is optimistic about winning their support. "In the end, the bondholders' main concern is that the bank survives and all the news over the last month has been very positive, so I don't see why those bondholders couldn't hold those bonds to maturity," he says.
Perhaps just as importantly, Melngailis has overseen a noticeable shake-up in Parex's communications policy. Unlike his reclusive predecessor Valery Kargin, Melngailis holds regular press briefings - and the fact that he speaks Latvian rather than Russian during them helps with the image of Latvia as a local bank.
He's also got some interesting ideas on how to use Parex's assets, including its well-regarded Parex Asset Management subsidiary. "We see PAM as a very big competitive advantage," Melngailis says. "The asset management and investment banking and advisory businesses are the strongest in the Baltic countries and these are both resources we could use for our restructuring, and particularly for clients who are in trouble.
"There won't be lots of M&A transactions like there have been for the last six years, but we do have a lot of large enterprises where we can use analysts and fundraisers to help raise equity and finance, so we'll definitely be getting into that area," he says. "Our first review of all the assets at Parex led to the conclusion that we don't see any assets that are costing us a great deal. In today's market when asset prices are depressed, we're certainly going to maintain a 'hold' strategy for all of our assets as long as we can."
More than one prominent local figure has told bne that Melngailis is probably "the best businessman in the Baltics." With that in mind, maybe they'll be cracking open the Carlsberg at Parex's head office rather than the champagne.
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