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Indecent proposal. Why Bureau of Economic Security opposes EBRD

The EBRD loan to Oschadbank: Why BES opposed the EBRD. Photo: UNIAN

The EBRD loan to Oschadbank: Why BES opposed the EBRD. Photo: UNIAN

A letter sent by the Bureau of Economic Security (BES) to Prime Minister Denys Shmyhal, Minister of Finance Serhii Marchenko, and Chairperson of the Supervisory Board of Oschadbank Baiba Apine has been brought to the Page’s attention.

In it, BES warns the Oschadbank management against accepting the proposal of the European Bank for Reconstruction and Development (EBRD) in its current version to provide a long-term loan with the possibility of converting into bank shares.

BES requires Oschadbank to revise the terms of the deal proposed by the EBRD. The Bureau is confident that the bank's proposal in its current form could harm Ukraine's economic interests.

EBRD loan to Oschadbank: Why BES does not like the proposal

Recall that in October the European Bank for Reconstruction and Development and Oschadbank signed a mandate letter. According to this letter, the EBRD will provide the state bank with a long-term loan with the possibility to convert it into shares. This is the first concrete step towards the partial privatization of Oschadbank. At the end of last year, the EBRD sent Oschadbank the terms of the deal.

As a source in the Cabinet of Ministers told The Page and as follows from the letter, BES was not satisfied with the terms of the deal for the following reasons:

  1. First of all, a loan of 100 million euros is provided to Oschadbank at 7% per annum, and in the future the rate may even reach 19%. Whereas now funding is provided by Oschadbank at 2% per annum. And small and mid-sized businesses should be granted loans at 5% per annum. At the same time, the bank, in principle, does not need additional financial liquidity. It is unnecessary for it.
  2. The loan amount cannot be less than 50 million euros. The loan must be taken out after signing the agreement in one tranche. The loan intended use: it must be used for lending to small and mid-sized businesses (SMB) for a period of 24 months. At the moment, SMB lending rates are lower than the price of a loan (4-5% in foreign currency). How Oschadbank is going to fulfill these obligations is not clear.
  3. The EBRD, according to the terms of the deal, gets a 20% discount off the bank's market value. Thus, the Cabinet loses 10-20 million euros from the bank's market value.
  4. At the same time, the EBRD has no obligation to convert debt into equity, even if the bank and the government fulfill all the terms of the agreement. Thus, there is a threat that privatization will not take place until the end of 2025 (this date is the IMF structural beacon). If the bank does not convert debt into equity, it must continue to service the loan, which reduces the value of the bank to other investors. There is a risk that the EBRD will not acquire a share in the capital at all, which increases the loan fee to 14%.
  5. The EBRD becomes entitled to sell shares to the government even after acquiring a share in the capital. The resale price is equal to the purchase price, and in some cases is an additional income for the EBRD. Thus, the government bears all financial risks. If the share price drops after privatization, the EBRD will be able to exit the capital, earning additional income.
  6. The government undertakes to pass or amend a number of laws of Ukraine ("On Joint Stock Companies" and "On the Cabinet of Ministers") and resolutions of the National Bank. At the same time, the Cabinet of Ministers does not have control over passing certain regulatory legal acts (laws and NBU resolutions). If such acts are not passed, there will be negative consequences for the Cabinet of Ministers and Oschadbank. Although the bank is not the subject of legislative initiative. And the government cannot take responsibility for the parliament. The National Bank is an independent entity as well.
  7. In case of replacement of the Chairperson of the Board or an independent member of the Supervisory Board, the EBRD is entitled to withdraw the loan. As a result, the process of selection, appointment of the SB members and the Chairperson of the Board may lose its independence with strong influence from the EBRD. The EBRD personnel will have a vote on the nominating committee, which is a conflict of interest.
  8. The EBRD chooses who will be the financial adviser in case of the enterprise's privatization. This makes the privatization process itself dependent on the main buyer.
  9. If the state wants to repay the debt ahead of schedule, it will have to pay 19% per annum on the loan. And that significantly increases the cost of EBRD withdrawing from the agreement if something goes wrong.
  10. If the EBRD does not use the option to convert debt into Oschadbank's equity, the bank pays additional commissions if it incurs a debt at less than 5% per annum.
Quote"All these absolutely non-market measures are presented in such a way that the European Bank for Reconstruction and Development will significantly improve Oschadbank’s performance. In fact, the EBRD is presented as a holder of secret knowledge that will solve all the accumulated problems of the industry in one moment. But in fact, we see a really non-market proposal," a high-ranking interlocutor in the government explains his indignation to The Page.
Letter from the Bureau of Economic Security to Prime Minister Denys Shmyhal, Minister of Finance Serhii Marchenko, and Chairperson of the Supervisory Board of Oschadbank Baiba Apine on the terms and conditions of the EBRD loan to Oschadbank. Photo: PG

Letter from the Bureau of Economic Security to Prime Minister Denys Shmyhal, Minister of Finance Serhii Marchenko, and Chairperson of the Supervisory Board of Oschadbank Baiba Apine on the terms and conditions of the EBRD loan to Oschadbank. Photo: PG

Letter from the Bureau of Economic Security to Prime Minister Denys Shmyhal, Minister of Finance Serhii Marchenko, and Chairperson of the Supervisory Board of Oschadbank Baiba Apine on the terms and conditions of the EBRD loan to Oschadbank. Photo: PG

Letter from the Bureau of Economic Security to Prime Minister Denys Shmyhal, Minister of Finance Serhii Marchenko, and Chairperson of the Supervisory Board of Oschadbank Baiba Apine on the terms and conditions of the EBRD loan to Oschadbank. Photo: PG

Letter from the Bureau of Economic Security to Prime Minister Denys Shmyhal, Minister of Finance Serhii Marchenko, and Chairperson of the Supervisory Board of Oschadbank Baiba Apine on the terms and conditions of the EBRD loan to Oschadbank. Photo: PG Thumb Letter from the Bureau of Economic Security to Prime Minister Denys Shmyhal, Minister of Finance Serhii Marchenko, and Chairperson of the Supervisory Board of Oschadbank Baiba Apine on the terms and conditions of the EBRD loan to Oschadbank. Photo: PG Thumb

EBRD loan for Oschadbank: Official positions of the parties

Officially, the Bureau of Economic Security and the Cabinet of Ministers do not comment on the letter. The estimates of the Ministry of Finance and Oschadbank are extremely restrained and vague.

"Oshchadbank is not entitled to comment on any proposals of the EBRD on the terms of raising subordinated debt, since this information is classified as banking secrecy. This also makes no sense, since we are only at the beginning of the negotiation process and no decisions have been made yet," the Oschadbank press service states.

The financial institution notes that in the privatization part, the owner of the bank, represented by the Cabinet of Ministers and the Ministry of Finance, plays a key role: they are the decision-making entities on this issue.

The only comment on the content of the EBRD proposal given by the Ministry of Finance to The Page was that the final terms and conditions of financing would be specified "after a comprehensive assessment and discussions."

The EBRD press service promised to comment on their proposal later. The Page will publish the outlet's commentary as soon as it becomes available to us.

Another problem for the EBRD

The scandal with the proposal made to Oschadbank does not involve problems at the Ukrainian bank, where the EBRD is a shareholder.

At the end of last year, the National Bank of Ukraine published the results of the bank stress testing. Summary: five banks have a shortage of capital even after all the measures carried out in the fall and early winter. Let's consider the banks Pravex, Forward, Lviv, Alliance, and Megabank. If the first four banks have capital problems that look small and solvable, then the story with Megabank is really highly unpleasant.

This is the only bank whose capital is expected to be negative even in the baseline scenario. It looks like the bank will inflict losses even with moderate economic growth. The estimated amount of capital requirement is from 2.5 to 3 billion UAH. Even if the main shareholders—Viktor and Olena Subotins—have that kind of money, there's no guarantee that the NBU will approve such an injection into capital. The requirements in terms of licensing, the reputation of the shareholders, and the origin of funds after the crisis are quite stringent.

Why did this happen. Roughly speaking, the loans granted by Megabank were given under a significantly overpriced collateral. That is, this refers to the insider loans. A clear violation of the instructions is evident.

One could blame it on the bank's shareholders, but there is one "but". 11% of Megabank is owned by the EBRD. And this means that the latter had influence on the bank’s Board and was obliged to create such a management and control structure where nothing of the sort would happen.

Quote"What's next? We are at a crossroads. Either to agree to proposals that are, to put it mildly, non-market. With very questionable results. Or defend our interests in this first round of bidding, having achieved a change in the terms of privatization. So that the deal becomes really commercially attractive for everyone. And not just for the EBRD," The Page's interlocutor in government sums up.

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