Parex - the good, the bad and the comfy

By bne IntelliNews March 30, 2010

Mike Collier in Riga -

The creamy leather Figueras seats of the 198-seater auditorium in Parex Banka's shiny 20,000-square-metre Meinhard von Gerkan-designed headquarters are just one example of the extravagances when the Baltic's largest indigenous bank was rolling in cash. But at a March 24 press conference to outline the roadmap to an eventual reprivatisation of Parex, one couldn't help wondering how much the comfy leather seats might be worth at a car boot sale.

The sale of Parex by the government at an unknown future date represents an incredible change in fortunes for the bank. Founded in 1992 by Latvian Russians Valery Kargin and Viktor Krasovickis, Parex expanded rapidly to become the second-largest bank in Latvia thanks largely to its talent for attracting big deposits from Russians looking to place their money outside Russia's borders, with no questions asked. But the liquidity crisis following the collapse of Lehman Brothers in the autumn of 2008 sparked a run on the bank and in late 2008 the Latvian government stepped in to effectively nationalise it, with Kargin and Krasovickis signing away their ownership for LVL1 (about €1.40) apiece.

Taking over Parex brought the Latvian state itself to the edge of bankruptcy, forcing it in turn to seek a €7.5bn bailout from the International Monetary Fund (IMF) and EU. Since then, regular cash transfusions totalling more than €1bn have seen the patient move from a critical to stable condition, while the Latvian government has become increasingly anxious to get as much of its money back as possible now that voters are demanding to know why Parex deserves more money than hospitals and schools.


The strategy outlined by Parex's chairman Nils Melngailis - who himself has proven to be one of the major assets as a stabilising influence - is a bit more subtle than the simple "split it into a good bank and a bad bank" strategy everyone assumed would be the case.

True, there will be a division into a "good" new bank probably with a new name and a rump "bad" bank that had might as well be called Parex. The "New Bank" will have assets of around €2.1bn and will continue to service existing accounts, but will also start the lending to businesses that abruptly ceased when Parex hit the wall, thanks to a new €100m agreement with the European Investment Bank. The expectation is that there will be a return to profitability as soon as 2011.

Meanwhile the rump "Old Bank" will focus on recovering resources from the loan book that took a hammering with the collapse of Latvian real estate values. But this bank won't be without worth. Parex's asset management division is well regarded and likely to attract interest. Bids are already on the table for Parex's Swiss boutique subsidiary AP Anlage und Privatbank, including an undisclosed amount from a group headed by Peter Hambro, chairman of Russian gold mining company Petropavlovsk (and an investor in bne). In Melngailis' words, "Investors are interested, but not all are interested in buying the whole bank." The division will enable parts of the bank to be sold off without impacting the core operations, which themselves should grow in value over time.

The market reaction has been positive. Two days after the March 24 press conference outlining the new strategy, the price of Parex's Eurobonds reached the pre-crisis level of 92.72% of their face value, a recovery from their lowest point of 34.95% of the face value hit on January 15, 2009. Kaspars Jansons, vice president, head of treasury at Parex Banka, said the market welcomed both the improved stability of the bank and the recovery of the Latvian economy, being reflected in the price of the bank's bonds on the secondary markets reaching pre-crisis levels. "Moreover, the current price level indicates that there are no visible risks as to the splitting up of Parex Banka and the decision made by the Latvian Cabinet of Ministers (to approve the plan) has not negatively impacted the price of the bank's bonds."

Much of the credit for the nuanced approach to the pre-sale restructuring of Parex goes to Nomura, which the Latvian government hired as advisors (to the usual cries of "waste of money"). Speaking to bne in Riga, Nomura's head of restructuring, Matthew French, says that while similar experiences in the past have proved helpful, the Parex case is unique. "What we have done is bring a rigorous analysis and financial modelling of the consequences of choosing each methodology. What we have also done is focus attention on the critical plan for approval and implementation, identifying a stronger path for obtaining European Commission approval."

French repeatedly stresses that the New Bank aspires to be "ordinary, in the best sense of the word" and offer "the best chance for the rebuilding of the franchise, possibly coupled with rebranding."

The split will also reduce the pressure for a forced realization of capital, turning a potential fire sale into something more like a Dutch auction. But it may also require politicians to resist the temptation to effect a quick sell-off ahead of October's general election.

Winning European Commission (EC) approval for the restructuring plan represents the first challenge. The Commission will need to be satisfied that the state aid given to Parex isn't skewing the marketplace and that the strategy is the best one for recouping the money sunk into Parex so far. With many of Latvia's larger banks under foreign (particularly Swedish) ownership, Parex's competitors are likely to jump on anything that smacks of subsidy. "The EC exists to ensure that there is no cause for concern. One of the natural consequences of the split will be that the new bank is smaller than the existing bank. Inherent in that is less competitive tension," French says, adding that subject to approval the split could be complete by the end of June this year.

Mitigating the fears of competitors may be a desire by some to buy the New Bank as a going concern. Institutions operating in the Baltics such as Nordea and DnB Nord have had a decent crisis and may be interested in control of Parex as a way of growing market share against the "big two" in the region, Swedbank and SEB.

French remains tight-lipped about likely buyers, but admits the bank might "quite possibly" be attractive to an existing player. Other names mentioned in the Latvian press as potential buyers include Spain's Banco Santander, Poland's PKO Bank and Russia's Alfa Bank, the latter after being linked three years ago with a move for Parex that never materialised. Alfa in particular might enjoy snapping up Parex for a fraction of what it was worth back then and gaining a fresh foothold in the EU.

French says that while the Parex case has some challenging features, particularly the severe decline in real estate values, there are also advantages, in particular the timely and significant state support which has ensured the continuance of operations. "There are other situations, for example in Iceland, where banks collapsed and the situation had to be resolved after that catastrophic event. The scenario is much more positive here," he says.

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