In 2022, we are going to invest up to $100 million in the NPL market, founder and managing partner of Investohills says
Exclusive interview of Andriy Volkov, founder and managing partner of the Investohills Group, to Interfax-Ukraine news agency
By Lidiia Shevchenko
– What do you see as major developments on the NPL market in 2021?
– The past year 2021 turned out to be exactly as I predicted. The sales of distressed assets by the Deposit Guarantee Fund (DGF) went down substantially. In total, the DGF sold 20 corporate debt lots. We bought five of them, and the rest were purchased by companies related to debtors directly or indirectly. There were no large and significant deals involving the debt of failed banks. The DGF statistics also confirm this. According to the DGF, it held more than 4,500 ProZorro auctions, of which merely more than 300 were successful. However, this includes sales of fixed assets, securities, receivables, etc. These are the top banks in terms of proceeds from asset sales in 2021: Rodovid Bank with UAH 769.6 million, Misto Bank with UAH 431.8 million, VTB Bank with UAH 354.0 million, Finance and Credit Bank with UAH 230.3 million, and Arkada Bank with UAH 218.4 million.
The attempted sale of the loan portfolio of Arterium Corporation, controlled by the oligarch Konstantin Zhevago, was the only sale that could claim the attention of financial companies. These loans were granted long ago by the failed Finance and Credit Bank, which Zhevago owned as well. Auctions with this lot were held off via the courts for many months, but the DGF was eventually able to hold the auction. However, the successful bidder bid well above the market value and failed to pay for it.
In 2021, state-owned banks entered the market with their loan portfolios. They are still trying to sell loans at the book value of the debt. Of course, no one will be willing to buy them at that price. Thus, together with other market participants, we are waiting for the price asked for the debt of state-owned banks to go down. Commercial banks have been selling mainly unsecured loans.
– Does it mean that the DGF has nothing to sell?
– The Arterium loans I have mentioned before are the largest portfolio still held by the DGF. The debt itself is not that large. Its book value is about $60 million. This is a fairly high-quality asset, and it is quite possible to sell it at 25-30% of the asked price. However, the major issue is that the sale of this portfolio is delayed deliberately. A so-called “rocket” scheme was used to upset the Arterium debt auction. The idea is that when a genuine buyer, who is interested in purchasing the portfolio, bid more than $22 million, the other bidder offered $36 million—way higher than the market price. It made no sense for the first bidder to bid up, so it didn’t. Eventually, the successful bidder failed to sign a contract with the DGF because “someone” contested the auction results in court before the payment was made. Arterium’s debt will be sold eventually, but not earlier than by the end of the year 2022, once all litigation is over.
– Do you think the Fund will be active on the NPL market this year?
– I think the DGF can offer not more than 10 to 12 portfolios at $1 to 2 million each in 2022.
– What about the loan portfolios of the “healthy” commercial banks?
– Commercial banks hardly run any new distressed debt. They have been very conservative about lending since 2014, and no one offers loans to high-risk clients. The loans granted before 2014 were either restructured or sold. The only distressed assets that they still may have are the foreign-currency mortgage loans because the banks were unable to recover them due to the moratorium that had been in place until spring 2021. Nevertheless, I do not expect any active sales of such portfolios—the banks will try to work them out on their own first. It means that the foreign-currency mortgage loans will make it to the NPL market in one year and a half or two years at the earliest.
– Let us get back to the state-owned banks. When will they start with an active clean-up of their portfolios? They are just about to be privatized.
– The privatization is not related to the loan portfolio clean-up directly. A deal to sell a bank can be structured to exclude these debts, and they can then be sold later at a discount. I’m not saying that the state-owned banks are doing nothing in this area. But we will hardly be able to see an outcome of this process before the end of the year 2022. Furthermore, the state-owned banks are trying to work out their debt in a peculiar manner. First of all, I am referring to Ukreximbank and Oschadbank—they tried to auction some loans at the par value of the debt in 2021. These loans have not been performing for many years; their par value, plus interest, fines, and penalties, often exceeds UAH 1 billion. And it is at this price the state-owned banks are trying unsuccessfully to auction them. Why are they doing this? If they start offering loans at a lower price, law enforcement and other controlling agencies can start raising issues with their management and asking why the price is so low. Thus, the only way out for the state-owned banks is to charge the highest price and lower it gradually to an acceptable market-based level. This is going to happen by the end of 2022. The actual price for loans of the state-owned banks will not hit bottom because many debts in their portfolios are of a much higher quality than the loans sold by the DGF.
– Are there any examples of the sold state-owned banks’ debt?
– The only case at the moment is an attempt by Ukreximbank to sell some loans of the bankrupt Lviv Bus Plant. The portfolio’s book value was UAH 60 million if I am not mistaken; the successful bidder offered UAH 170 million. Evidently, it makes no economic sense. And this successful bidder was not genuinely successful. The auction winner did not pay the price and “resorted to litigation.”
– What is going on with PrivatBank’s distressed loans? According to the NBU, they still have a distressed debt to the tune of UAH 175 billion. It is a huge amount. What can be done about it?
– PrivatBank’s NPL portfolio consists of two parts. Most of the distressed loans are corporate loans associated with the former owners. There is no way for privatization to involve these loans. No reasonable investor will be willing to litigate for years. It is also exceedingly difficult to price these assets. It is hardly possible. It will be up to the NBU, the DGF, and the Prosecutor’s Office to deal with these loans.
However, the second part of the portfolio comprises genuine debt under loans that PrivatBank granted to regular companies. They account for only 3 to 5 percent of the portfolio, and they still can be worked out. Also, the bank has a huge portfolio of distressed retail loans. PrivatBank sold some of them in 2021, and we expect them to offer a part of the portfolio for sale in 2022.
– What are the most interesting cases your company pursued in 2021? Can you shed more light on them?
– In 2021, litigating with debtors challenging results of the DGF problem bank loan portfolio auctions was the most significant event for us. We pursued a number of cases all the way to the Supreme Court and won. We will rely upon these precedents during the litigation in cases that involve loans set off fictitiously.
Such setoffs were widespread during the 2014-2015 banking crisis, with third-party deposits in failing banks used to repay performing loans with good collateral. On the eve of the failure, bank management carried out such transactions without having any funds on their banks’ correspondent accounts, just on paper. In fact, the loan was not repaid, and the setoff damaged other depositors who were unable to get any funds from such loans. For this reason, the DGF declared such transactions to be null and void and sold claims on these loans. We have quite a few such loans. We are facing these unscrupulous debtors in the courts, providing evidence that no loan repayment actually occurred.
The sale of the bulk of our credit portfolio to foreign partners—Emso Asset Management Limited and APartners Capital Investment Management Limited via Investohills Helianthus investment fund—became another important event. These companies will work out these loans with our support. At the moment, we have almost no distressed debt on the balance sheet. It reflects Investohills’ strategy, with some collection effort done in-house and the rest handed over to other investors who are willing to work with these debts.
It should be borne in mind that once Investohills Vesta’s assets are bought out, the foreign investors will control a diversified distressed assets portfolio to the tune of more than UAH 50 billion. Thus, in spite of a complex economic and geopolitical situation, foreign investors demonstrated their genuine credit of trust in Ukraine as a state and the Ukrainian economy in particular. We managed to find strategic partners focused on long-term cooperation and the development of financial markets in Ukraine.
– What are your plans for this year, other than buying debt from problem banks?
– We will keep buying the portfolios the DGF offers for sale. For instance, we are going to take part in a new Arterium auction. We are also interested in the debt to utilities. It is a new market for Ukraine that has great potential. We are negotiating the purchase of debt portfolios with energy suppliers. The plan is to have the first deal closed in the coming months. We will continue to take part in privatization auctions. However, we have not been successful there so far. Potentially, we are interested in buying assets of small and medium-sized enterprises, including those in the process of bankruptcy, on ProZorro. Our plans call for investing up to $100 million in the NPL market in 2022.
– Does the exacerbated military and political situation in Ukraine affect the NPL market and the business climate in general? Are investors becoming more nervous?
– The impact is definitely negative. First of all, it bears on relations with foreign investors, who are likely to adopt a wait-and-see attitude. Most likely, they will close the deals started earlier, but few of them will come to Ukraine with new projects. At least, for the time being. Fortunately, this political instability did not scare off our buyers, but they are used to working with distressed assets, and their conduct is an exception rather than a rule. Domestic businesses are more or less adapted to working under such conditions because the tensions have been there for many years; however, they are still nervous. As a result, many potential buyers put their activities on hold or sell their assets out in a rush.
Investohills Group has engaged in investment and asset management in the Ukrainian and international markets for more than 12 years; the group is Ukraine’s NPL market leader. Established in 2009 as an investment company specializing in distressed assets and special situations, Investohills became the largest debt management operator in Ukraine.