The story of Ukraine's PrivatBank reached a critical milestone on July 3 after the lender’s oligarch former owners failed to deliver a restructuring plan for its related parties portfolio totalling billions of dollars. The national authorities have said they will now move to recover the funds in a kind of “foreclosure”.

So far it has cost more than $7bn to rescue the country’s largest lender from collapse. After the expiry of the July 1 deadline for the restructuring agreement, and with the bank’s bondholders bailed in and vast sums of taxpayers’ money used to cover a gaping hole in its capital, the central bank indicated that legal proceedings may be started against Ihor Kolomoisky and Hennady Boholyubov.

“The term of voluntary restructuring of loans of former owners of PrivatBank expired on 1 July,” the National Bank of Ukraine (NBU) said in a statement. “The former owners have failed to fulfill their obligations.”

The businessmen had committed to carrying out a restructuring programme by mid-2017. If they could successfully restructure 75% of the portfolio, the NBU said it would consider the possibility of extending the restructuring for the remaining 25% until late 2017.

The authorities have a legal option to try to prosecute Kolomoisky and Boholyubov for allowing the bank to go insolvent. However, in the past three years, there have been no precedents in Ukraine of owners of bankrupted lenders being punished under this law.

According to the regulator, the state and PrivatBank have moved to a legal procedure for application of an appropriate legal strategy, but “specific steps” cannot currently be disclosed. The banking procedure will be similar to the usual procedure for repossession in case of overdue debts, so it is “more about foreclosure”, the NBU added.

The government announced the nationalisation of the country's largest lender last December after it failed to fulfill a three-year recapitalisation plan. The bank was found to have a UAH148bn (€5.1bn) hole in its balance sheet, which at the time was said to be almost entirely due to related-party financing.

In April, NBU governor Valeriya Gontareva told journalists that the post-nationalisation audit of the bank found that 100% of the corporate portfolio was issued to related parties.

To cover the capital shortfall, the government injected UAH117bn (€4.1bn) and bailed-in PrivatBank’s non-deposit unsecured creditors for UAH29.4bn ($1.1bn), including bondholders for the amount of $595mn. On June 23, the Ukrainian authorities said they will inject UAH38.5bn (€1.3bn) of additional capitalisation.

“Their responsibility”

The seeming sense of impunity flaunted by the billionaire partners in recent months has been a cause of wonderment in Ukraine and abroad, given the intense pressure exerted on the country’s post-Maidan government to clean up corruption and mismanagement of the economy.

Ukrainian Minister of Finance Oleksandr Danylyuk told bne IntelliNews during a press conference at the EBRD Annual Meeting in May: “There is still a feeling of [Privatbank being] a hot potato. There is no hot potato. The shareholders took the responsibility – the obligation – to restructure the loans by July 1. We appointed the advisors that will run the restructuring three weeks ago. They will now work on these loans. Obviously if it is not done no one will forgive $6bn put into this bank. But this is a question to put to law enforcement. This is their responsibility.”

Timothy Ash, a senior sovereign strategist at BlueBay Asset Management, believes that the current crisis over PrivatBank “could prove to be a festering political wound for the administration Ukrainian President Petro Poroshenko unless it proves able to go after some (all) of the $6bn in lost assets”.

Meanwhile, the finance ministry said in a separate statement on July 2 that “no significant progress has been made towards restructuring” by the former owners of the bank. “Instead, we are observing a coordinated legal and media campaign against the interests of the state,” the statement reads.

Recently, the Ukrainian authorities and PrivatBank engaged a consortium of companies - Rothschild, EY and FinPoint - to accelerate negotiations on the restructuring of the loans granted to former owners or the parties that were directly or indirectly related to them, according to the ministry.

“The consortium is expected to submit the final report very soon,” the statement added. “After it is thoroughly studied, the decisions would be taken as to further steps.”

The ministry also published a letter signed by Kolomoisky and Bogolyubov, according to which they committed to carrying out a restructuring programme by the middle of 2017.

“The former shareholders of the bank unilaterally committed themselves to support the bank’s nationalisation process, not to put pressure on the government agencies and the new management of the bank, not to prevent the bank’s operations in the future, and to undertake restructuring of the loan portfolio by 1 July in order to compensate losses to the state,” the ministry commented about the letter.

Meanwhile, Kolomoisky, who has rejected allegations of any wrongdoing, said in an interview with the TSN television station on July 3 that the bank’s former owners are continuing negotiations with Rothschild, EY and FinPoint “in accordance with assumed obligations”.

The businessman branded the unfolding scandal over PrivatBank an “informational buzz” raised by NBU officials due to “lack of information about the negotiations” with the consortium.