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Coms are poor but Privat-Bank means bail-in

PrivatBank_230
By Virginia Furness
24 Jan 2017

Holders of newly nationalised PrivatBank’s Eurobonds are pushing back on the National Bank of Ukraine’s plans to bail-in the debt, but the government should not have to take on the liabilities of sophisticated lenders in event of a default. But it does need to be much clearer about its plans.

Any arguments that the NBU should reconsider its decision are misplaced. For one, investors have been amply rewarded for holding PrivatBank risk. The bank was rated Ba2/B-/B- at the time the most recent bonds were issued in 2013, and investors should have carried out ample due diligence to fully understand the risks.

Also and more importantly, the government has every right to bail in the bonds. Under Article 41.1 of the Law of Ukraine on Households Deposits Guarantee System, Ukraine’s Deposit Guarantee Fund (DGF) has the power to write down a bank’s bonds.

But PrivatBank’s nationalisation was certainly not managed in the most transparent manner. In December it came a surprise to many in the international community who asked why they were doing it. The bank had a shortfall of Hrv148bn ($5.4bn) and the size of the deficit led to questions about how long the NBU had known about it.

Communication around the issue was poor and carried out over the Christmas period when most of the buy-side were not at their desks.

On December 26, the NBU issued a short statement to holders of PrivatBank’s $175m 10.875% loan participation notes due 2018, its $200m 10.25% LPNs due 2018 and its $220m 11% LPNs due 2021. It said that under Article 41.1 of the Law of Ukraine, the notes would be bailed in during the “temporary administration of PrivatBank”. The NBU left a nice open wound for bondholders to pick at by saying “more information will be provided in due course”.

Creditors have of course leapt on this statement with the hope of clawing back the principal. A pool of bondholders has filed lawsuits against the bank at several foreign courts requiring an arrest of the foreign correspondent accounts.

And as of yet, the NBU has said nothing further, at least publicly. But Dmytro Sologub, deputy governor of the NBU told GlobalCapital recently that while bondholders may bring a lawsuit, under Ukrainian law, what stands is the bail-in.

“We’re bailing in the liabilities of related and non-related entities,” he said. “If a bank is nationalised, why should the government take on the liabilities of sophisticated lenders?”

But a lack of vital information always leads to speculation, and the NBU needs to learn that being as transparent as possible around such processes would make it much simpler.

In the NBU’s defence, it has never gone through anything like this before, and nor have the senior bonds of any EMEA financial institution, at least not to this extent.  

Whether or not the bail-in is in PrivatBank’s best interests is another matter. As Exotix Partners points out, two other systemically important Ukrainian banks have been restructured without being bailed-in and PrivatBank may be damaging its future prospects of bond market access should it wish to raise external debt in the future.

As usual, the squabble between bondholders and PrivatBank is at risk of obscuring the bigger picture. Banking sector stability is a key component of the IMF’s reform requirements for Ukraine and the NBU has taken decisive action to address this.

But it is not helping itself by obfuscating the process. PrivatBank’s nationalisation should be seen as a victory for NBU and for the stability of Ukraine’s financial system, but at the moment it is not seen as one.  

By Virginia Furness
24 Jan 2017