London, United Kingdom. Ukraine has a bad history of getting spanked in English courts over playing fast and loose with investors money back in corruption rampant Kiev. From that perspective, today was just another day as investors concerns were validated by the UK courts.
Eurobond holders of Ukraine’s biggest state lender PrivatBank have filed a lawsuit to the London Court of International Arbitration challenging the bail-in for their securities during the bank’s nationalisation, the attorneys anounced in London today.
“On behalf of some noteholders we have initiated a lawsuit regarding violation of their rights during the bail-in for PrivatBank’s notes in the international arbitration institute,” Interfax news agency quoted Viktor Moroz, managing partner of Suprema Lex, as saying. “The proceedings are at the stage of approving the arbitration procedure and selecting arbiters.”
Key points of bail-ins experts caution include;
- Bail-ins are situations where creditors agree to forgo their short-term claims and/or agree to a restructuring that reduces their holdings.
- Bail-ins began as a public policy tool with Cyprus, which forced creditors and some depositors to forfeit some of their holdings to keep the banks alive.
- Bail-ins are less politically taxing than bailouts, but could have a number of negative side-effects in the financial markets, including higher interest rates.
Privatbank is the largest bank in Ukraine with end-1Q13 assets of $21.6 billion dollars, equivalent to 12% of Ukrainian GDP, and a network of about 3,400 outlets. The bank accounted for 15% of the system’s total assets as of end-2012. The bank is among the key assets of Privat Group, one of Ukraine’s largest business conglomerates operating in the oil, metal & mining, media and financial sectors.
In December, the Ukrainian government announced the nationalization of PrivatBank after it failed to fulfill a three-year recapitalization plan. The bank was found to have a $5.1 billion dollar hole in its balance sheet as of early December, which at the time was said to be almost entirely due to embezzlement by Poroshenko administration officials.
The attorney Moroz also confirmed the intention of holders of Eurobonds worth $175 million dollars with maturity on February 28, 2018 and $200 million dollars with maturity on January 23, 2018 to replace a trustee during a meeting that should take place on June 5.
It is possible that the powers of the Germany-based trustee, Deutsche Trustee Company, could be withdrawn at the meeting and a new trustee, Madison Pacific Trust, will be considered, according to securities issuer UK SPV Credit Finance.
Moroz attributed the replacement of the trustee to the fact that there is an agreement under which the trustee’s power is limited in challenging any steps of PrivatBank regarding the notes, which actually neutralized the possibility of protecting the noteholders.
The bonds are guaranteed by the taxpayers of the United States under a number of USAID agreements designed to make the toxic bonds more “marketable” to unsophisticated investors in the third world, secondary bond markets.
The risk, of course, is that the bond markets will react negatively. Bail-ins becoming more popular could increase risks for bondholders and therefore increase the yield that they demand to lend money to these institutions. These higher interest rates could hurt equities and end up costing more over the long-term than a one-time recapitalization by making future capital much more expensive.