Fixed Income Analysis /
Ukraine

One small step for PRBANK... one giant leap for all senior bonds

    Tolu Alamutu
    Tolu Alamutu

    Credit Research Analyst, Banks

    Tellimer Research
    25 July 2019
    Published by

    The London Court for International Arbitration (LCIA) has made an award in favour of holders of Privatbank senior bonds. The two US$-denominated bonds total US$335mn (based on Bloomberg data). We see this news as both important and significant, for Privatbank and for holders of senior bonds in general. If no award was granted, it would effectively have meant zero recovery on senior bonds of a bank classed as systemically important, which remains a going concern. Such a ruling may have had undesirable implications for Ukrainian banks looking to access foreign bond markets in the future.

    What we know about the award: Full details of the award have not been provided by the Trustee. However, in documentation published on 22 July, the Trustee disclosed that two factors will impact the right to repayment. The first is the identity of bondholders. In our read of this, it may be that the award differentiates between parties related to the former shareholders of Privatbank and other bondholders. The second factor is when the bonds were acquired. Holders that purchased bonds after 14 June ‘may not have the same rights to repayment’. As an aside, the mention of ‘repayment’ suggests a par award is possible. However, as stated before, the Trustee has not publicised full details of this award.

    Some risks remain: Holders of the relevant bonds have been asked to provide information to the Trustee, which will be passed to Privatbank’s lawyers. This includes identity information, the principal value of notes held and account details. The deadline for this is 13 August. The Trustee has cautioned that provision of this information ‘does not guarantee repayment’. In addition, the Trustee disclosed that on 11 July, it issued proceedings before the English Courts which would allow for payment of the award and would permit the Trustee to ‘make payments to some but not all’ bondholders; as this is what the award requires. These two sets of risks – related to information to be provided to Privatbank’s lawyers and to the Trustee’s ability to treat bondholders which rank pari passu differently – are too great to ignore. These risks may well lead to further delays to the repayment of Privatbank senior bonds where holders are not affiliated with the former shareholders. This is unlikely to be welcomed, given that Privatbank was nationalised, and bonds written down, in December 2016, and the senior bonds were to mature in January and February 2018.

    Summarising other recent developments: Several court cases involving Privatbank, the National Bank of Ukraine (NBU), former auditors and former shareholders are still pending; in Ukraine, the UK, the US and elsewhere. In Ukraine, the outcomes of the many cases have been mixed, with the Supreme Court ruling in favour of the bank in some instances and siding with the former shareholders in others. On performance, Privatbank recently disclosed net income of UAH18.3bn for the first half of the year, 2.6x the H1 18 level. In a brief press release, management highlighted that loans to SMEs and to individuals increased, and so did customer deposits. The bank paid a dividend equivalent to 90% of 2018 net profit to the State. While it may appear that the bank rewarded shares, which rank below bondholders, Privatbank is likely to argue that it is yet to fully compensate the state for its investment in the bank, and the dividend is one way to do so. The bank’s ratings were recently affirmed by Moody’s and Fitch, according to its press releases.