Ukraine's egg king finds his bank, other businesses in financial hot water

By bne IntelliNews October 8, 2014

Graham Stack in Berlin -


VAB Bank, 90% controlled by Ukraine's leading agriculture oligarch Oleh Bakhmatyuk, has said it is looking for a foreign investor to boost share capital, in a move that smacks of desperation after the bank announced October 2 it had defaulted on a $2m coupon payment.

VAB CEO Denis Maltsev said in a statement posted on the bank's website that as a result of the events of 2014 in Crimea and the eastern Donbass region, “a significant number of clients are no longer able to meet their obligations towards the bank, in particular hard currency borrowers.” At the same time, he said, depositors have withdrawn over UAH200bn (€12bn) in cash since the start of the year.

Maltsev said that the bank would recapitalise with the help of foreign investors and "the obligatory support of the National Bank of Ukraine (NBU)," which would "guarantee that the bank's meets its obligations under complete control of the NBU."

VAB failed to make a coupon payment of only $2m that was due on September 14. On October 2, Maltsev blamed the default on the difficulties in finding the cash in Ukraine, given the NBU's tight controls on the currency market, but said the bank would find the cash with "a week or two," as quoted by newswires.

In order to shore up the hryvnia exchange rate, the NBU has introduced tight controls on the currency market and restrictive policy regarding refinancing and stabilization loans, with numerous smaller banks going out of business in recent weeks.

VAB is Ukraine's 15th largest bank by assets, but the alarming fact is that it is – informally – part of the country's largest agriculture holding, owned by oligarch Oleh Bakhmatyuk. Bakhmatyuk was deputy head of state energy giant Naftogaz from 2005 to 2006, becoming the country's largest egg producer via his Avangardco firm, which did an IPO on the London Stock Exchange in 2010. He is also the country's largest landholder, thanks to grain producer Ukrlandfarming, which had been planning an IPO for this year. Bakhmatyuk holds controlling stakes in VAB, Avangardco and Ukrlandfarming.

Parallel to VAB's failed payment, Ukrlandfarming successfully made a $27m semi-annual coupon payment on a five-year Eurobond on September 26. Ukrlandfarming issued a $500m Eurobond in 2013 at with a coupon of just over 10%.

Investors speculate that Bakhmatyuk may have pumped VAB dry in order for Ukrlandfarming to make its coupon payment. Ukrlandfarming failed to comment on its connection with VAB to bne, but Bakhmatyuk's individual group companies have always maintained that the businesses are separated by Chinese walls, in particular claiming that grain producer Ukrlandfarming does not sell its grain to egg producer Avangardco, the main input of which is grain. VAB bank, however, acknowledges that it primarily services the agriculture sector.

"It’s unclear why a bank with total end-1H14 assets equivalent to $2.0bn, of which $0.5bn is denominated in foreign currency, should spend three-to-five weeks accumulating $0.002bn for servicing its external obligations,” writes Concorde Capital's Aleksandr Paraschiy. “All these uncertainties cannot but influence the other assets of the bank’s majority shareholder Oleh Bakhmatyuk like Ukrlandfarming and Avangardco.”

Standard and Poor's retained a pre-default 'CCC' rating on Ukrlandfarming's foreign debt on October 3, in view of better-than-expected first-half results. But the rating agency warned that the ongoing slump in world corn prices, falling a third alone since August, the dominance of local currency revenues for egg producer Avangardco against the background of a 40% devaluation in the hryvnia, and weakening domestic demand as Ukraine's economy crashes by as much as 10%, will put strain on Bakhmatyuk's companies' ability to serve their foreign currency debt. In addition, Avangardco has lost facilities in annexed Crimea and war torn East Ukraine.

Confusing the picture, Avangardco's October 1 AGM generously decided to pay out $29.5m in dividends to shareholders, 12.5% of 2013 net income. Avangardco also announced a buyback of Eurobonds. Avangardco had $236m in cash on its books end of June, which would suffice to buy back all its $200m outstanding Eurobonds, priced at 90% of face value, and pay the dividends, according to Concorde Capital analyst Roman Topolyuk.

Questions were raised earlier in the year about Bakhmatyuk's business practices when in April the leftwing Austrian MP Peter Pilz held a press conference in Kyiv accusing Bakhmatyuk of involvement in one of Europe's largest banking scandals, Austria's Hypo Alpe Adria bank was the subject of a massive banking scandal, which has led to criminal convictions against six of the bank's former managers and a bailout that cost Austrian taxpayers €5bn. According to Pilz, with reference to the criminal investigation, Hypo Alpe Adria's Ukraine subsidiary lent €57m to Bakhmatyuk's companies in 2004-2009, subsequently losing most of the funds. Bakhmatyuk at the time denied all allegations, saying that they were politically motivated.

In August, Crimea's unrecognised, self-proclaimed government announced it would nationalise one of Avangardco's laying facilities. Conversely, Avangardco's state-of-the-art egg facility Imperovo announced October it had received certification from the EU for exports.


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