Fixed Income Analysis /
Ukraine

Privatbank: Good things come to those who wait

    Tolu Alamutu
    Tolu Alamutu

    Credit Research Analyst, Banks

    Tellimer Research
    8 October 2019
    Published by

    Par plus accrued – a noteworthy award: As we discussed in a previous report, holders of Privatbank’s senior bonds have been granted an award by the London Court of International Arbitration (LCIA). We understand bondholders have been informed that this award is equivalent to the aggregate principal amount on the notes plus accrued interest, less costs incurred by the Trustee. We consider this to be an excellent outcome, given that the two senior bonds were effectively written down to zero as part of the nationalisation process in December 2016. As we have stated before, confirmation of zero recovery on PRBANK senior bonds may have had undesirable implications for Ukrainian lenders looking to access foreign bond markets in the future. We note that only the ‘operative paragraphs’ of the award have been made available without needing to enter a confidentially agreement. The partial award is based on an ‘illegality defence’. A ‘bail in defence’ still appears to be pending.

    Patience remains key: The LCIA has only granted a partial award – payment is restricted to bonds which are not held by the former shareholders of PRBANK and their beneficiaries, or by certain entities. As a result, the Trustee has applied to the English Courts, seeking direction on paying some bondholders and not others. The hearing on this is not scheduled until late February 2020. The outcome of this court case may not be known for some time afterwards. Thus, it may take more time for holders to receive the LCIA award.

    Pari passu clauses – considering precedents: According to the terms of Privatbank’s senior eurobonds, the notes ‘shall at all times rank pari passu and without any preference amongst themselves.’ This may explain why the Trustee is seeking direction from the English Courts. The best-known cases regarding pari passu clauses involve sovereign obligations. These include now-infamous court rulings involving Argentina and Peru. There is at least one precedent for treating creditors with similar claims differently. In restructuring its share of the debt of former Yugoslavia, Slovenia recognised the claims of some creditors and not others. That sovereign stated that claims by entities and persons related to the Serbian State should be excluded. This precedent may prove important. Added to this, in a 2005 report the Financial Markets Law Committee (FMLC) concluded that under English Law, the pari passu clause means claims rank equally, but does not require a debtor to actually pay all claims pro rata ‘except where the clause is very clearly drafted to achieve this effect’. The FMLC confirmed this view in 2014 and 2015. Thus, we think there is a non-zero chance of success in the London High Court case. We note, however, that the FMLC conclusion referenced sovereign obligations. Further, any ruling which permits the Trustee to pay some creditors and not others without further liability may be challenged by bondholders impacted by this.

    Lot of ‘noise’, but best to focus on bond-specific cases: The IMF mission recently departed Ukraine, without reaching a definitive agreement. Discussions between Ukraine and the IMF are continuing. Separately, the country home of Valeria Gontareva, the former chair of the National Bank of Ukraine, has been subject to an arson attack. Gontareva claims that she has received death threats and was involved in a collision with a car in London, which she believes was no accident. In addition, there are still concerns that the nationalisation of Privatbank may be reversed, which could have significant implications on banking sector stability. The EBRD has stated that it is monitoring this closely. Several cases involving the bank’s former shareholders, Ukraine’s authorities and Privatbank itself in various jurisdictions are yet to be resolved. In summary, there is still a lot of ‘noise’. For bondholders, we think it is best to focus on cases specific to securities they hold. We believe the LCIA and London High Court cases have much clearer implications for bondholders than any others.