Wild West: how banks get rid of problem debts – an honest conversation with the buyer

IMG 8057 scaledAndriy Volkov, CEO of “Investohills Vesta”, on how the market has moved from collection practices to business on distressed assets

The annual volume of $150-200 million, transactions for hundreds of millions of hryvnia – amounts of this order are turned around annually in the market of problem debts in Ukraine.

NPL or non-perfoming loans (loans that are not serviced) for many are associated with the big bank fall of 2014-16, someone equates this business with tough collection practices.

Both definitions have a right to exist, but neither of them describes the full picture – much more complex and filled with an interesting historical background. It contains many significant events for the financial market and no less well-known names that have left a mark on the history of the Ukrainian economy.

How Nikolay Lagun bought debts from Leonid Chernovetsky’s bank, how the French from BNP Paribas who bought “Ukrsibbank” got rid of the “problem”, why the first years of the crisis of 2014-15 are sometimes called the “Wild West” and are the debts of the Klyuev brothers interesting to anyone now?

About this LIGA.net spoke with Andriy Volkov, CEO of “Investohills Vesta”, the largest player in the market of distressed assets in Ukraine.

“Before the 2008 crisis, even fitness trainers talked about real estate speculation”

– The period of the mid-noughties in Ukraine, among other things, was remembered for the era of “mindless lending”, which ended with a painful collapse after the crisis of 2008-09. This was the first stage of the formation of the Ukrainian bad debt market?

– Despite the very active lending, before the 2008 crisis, there were practically no problem loans in the system. The main reason is that the banks did not look to issue new loans – it was very easy to re-credit. Moreover, the prices of mortgages, among which the main type was real estate, were constantly growing.

From that period, I remember one story. In the summer of 2008, in the gym, I accidentally witnessed a conversation between two coaches, in which they discussed how to profitably take out a loan without a down payment and invest in the purchase of several apartments in buildings under construction for resale. I was working on the board of Alfa-Bank at the time, and my first thought was, “I hope they’re not talking about my bank.” The second – “even if fitness trainers have taken to speculating in real estate, the crisis of this market is inevitable.”

– That is, the banks were seriously concerned with the issue of problematic or potentially problematic debts only after the disaster of 2008-09?

– Yes, and it was a retail problem. After 2008-09, banks began actively trying to sell such assets. The most thoughtful in this sense, I think, was “Ukrsibbank”. It started selling around 2010. “Investohills” company was already working in the market at that time, together with “Delta Bank”, we bought a mortgage portfolio of “Ukrsib” with a nominal value of $600 million (until now, this transaction remains a record in the market of distressed assets in Ukraine, – Ed.).

This period can be considered as the formation of the market of distressed assets in Ukraine. A number of players appeared, there were serious deals, and it cannot be said that any of the companies then had a dominant position.

– There is an opinion that this process was greatly facilitated by the massive entry of foreign capital into Ukraine – many Ukrainian banks needed to clear their balance sheets of problems before selling.

I don’t agree. Foreigners bought Ukrainian banks until 2008. At that time, I can only recall one major transaction of this kind – when the company of Nikolai Lagun CCG bought the problem portfolio of Pravex-Bank (in mid-2008, the bank was bought from the family of Leonid Chernovetsky by the Italian group “Intesa Sanpaolo”, the transaction amount is almost €500 million, – Ed.). Otherwise, such practices were not widespread – again, because any problem borrower could very easily over-credit.

“Selling the problem portfolio was a way to get at least some money”


– Why was there a need for a separate market for collection companies after the crisis?

– For a long time in our market there were only two banks with really powerful collection departments – “Alfa” and “Privat”. For the rest of the banks, the easiest way to get at least some money was to sell the problem portfolio. Somewhere it was difficult to focus on this, somewhere there was simply not enough volume to make money on the problem. The “daughters” of Western banks generally lived on the principle of “sell the problem portfolio and move on”, which even seems to me the most pragmatic approach.

– At what discounts were such assets sold at that time? Higher than the Guarantee Fund currently sells?

– It is a misconception that previously distress assets were sold for serious money, and now the Fund sells for a penny. There are examples when a well-developed portfolio by the bank itself was sold at a discount of 99%. But on average, prices were slightly higher. For example, our purchase of the “Ukrsibbank” mortgage was at a discount of 88%.IMG 8052

– Still significantly higher than the Fund.

– Yes, but we must take into account that the quality of these assets was much higher. Secondly, the supply was much smaller than it is now, so there was more room for haggling.

– There are several examples when banks, in particular Western ones, solved the problem of problem debts on the balance sheet by simply transferring them to their own financial companies. How popular was this story?

– Almost everyone was engaged in this, probably, with the exception of state-owned banks. It was a way to adjust the balance sheet so that the bank would not have problems with capital ratios. Further – it depended on the approach of the owners and management. Someone sold their financial companies immediately after the transfer of problematic portfolios to it, someone tried to engage in collection. But there was no efficiency or business in this story.


“2014-2016 – The Wild West for the problem debt market”


– There are legends about the opacity of the first sales of assets of bankrupt banks, which were managed by the Guarantee Fund after the bank fall of 2014-15. Did you try to participate in those auctions, or was it an “asterisk challenge” for market companies?

– In this sense, 2014-16 was just a kind of “Wild West”. Until the Fund created a centralized sales department, amazing things were happening to its assets. 50 or 60 exchanges were accredited, each had its own rules, and there were always some difficulties. For example, an asset that is physically located in Kyiv could be sold at an auction in Poltava. To participate in it, you had to go there, fill out a bunch of documents and take into account that there are risks of not passing by some criteria known only to the exchange itself. All this was done so that one or two necessary participants came to the auction, who bought the asset at the lowest price.

– Who made money from such a chaotic situation? At that time, the Fund often complained about the so-called insiders – ex-employees of bankrupt banks, who could point to the most profitable assets and, accordingly, organize their sale at the lowest price. But was this story centralized?

– I don’t think so. Actually, that’s why I use the expression “Wild West”. There were numerous groups. They included the exchanges themselves, the appraisers on whom the price of the asset depended, perhaps indeed insiders, certainly debtors. Probably someone was able to make more money on this than others, but I would not say that in those conditions, in principle, there could be any one “megamind”, on which all the schemes were closed.

– How was the bank’s debtors organized to buy out their own loans? And how well did they succeed?

– It usually happened like this: the market knew that such and such a borrower wanted to buy back their debt. To do this, he gave instructions to several financial companies, they were already engaged in organizing the buyout, and not directly, but through other intermediaries – as a rule, these were tiny firms that went directly to the auction. Therefore, this chain was often very difficult to track and there is usually no direct evidence that a particular asset was bought by the borrower himself. It was during this period that the most high-quality assets were sold – with good collateral in the form of working businesses, liquid assets.

– Have you been contacted with a similar request?

– We did not organize such transactions – for this you need to be an insider and correctly assess the internal situation with the bank or the debtor. At the same time, in those days it was an absolutely standard story. I think this happened 80% of the time.IMG 8058 scaled

– Is this normal? It turns out that the debtors remain in a clear plus, and the banks – no, because they eventually do not return the loan.

– I think that in a situation with bankrupt banks, this is the perfect outcome, since it is the debtor who is most interested in his loan. But in order for him to pay the maximum possible amount, it is necessary to create market conditions and clear rules and procedures, so that there is competition, so that the debtor is afraid that if he does not buy out his loan at the market price, then someone else will buy it out and make him pay. After the snowfall, our market lost several years before such rules appeared. During this time, high-quality assets were either bought out by debtors for a song, or lost in numerous courts and bankruptcies. That’s why we see such high discounts now.


– How often are their competitors interested in the debts of businessmen?

– It’s a very exotic story. The purchase of debt as a tool of competition – in our practice, I do not remember this. There were cases when customers actually asked to buy the debt of another company from the same market, but not in order to somehow harm it, but to get an interested collateral, for example, a store room that is in a good location. But I wouldn’t call it a method of attacking a competitor.


– What happens next with the loan repurchased in the interests of the debtor? The financial company simply assigns him his own debt?

– To the debtor – no, because the debt repurchased at a discount means an income tax liability. Usually, the debt is conceded to a related legal entity, and then everything depends on the goals of the owner. The nominal holder of the debt can “forget” about it. Or, on the contrary, to make claims to a related debtor in order to optimize flows within the business group and thus reduce taxes to the main legal entity. In some cases, the debtor wants to go bankrupt in order to bring the assets to a “clean” company. In short, there are a lot of options.


“The market has experience of profitable work with the assets of the Klyuev brothers”


– This year, the Guarantee Fund will probably finish selling its assets. What will happen to the distress market after that?

– I see three directions that can be reoriented. First, the problem portfolios of state-owned banks, second, small-medium-sized privatization, since state-owned enterprises can also be considered problem assets, and third, debts in the energy sector.

– If we talk about the debts of state banks, it is known that a significant part of them are “political loans”. Is the market interested in working with such assets?

– I think so. For example, we are interested in large cases, and we have money for this.

– Is there a particular difficulty in working with political NPLs? For example, “Oschad” and “Exim” have loans from the Klyuev brothers.

– For us, it does not matter who is behind the asset. If the debtor doesn’t want to make contact – and I don’t think runaway politicians will – we’ll just collect the bail. For example, a factory. Moreover, we have a positive experience with the debts of the Klyuevs. In 2019, we bought the claims of the “Aktiv Bank” for their solar power plants and a year later we came out of these debts with a profit.

– At one of the recent events, the head of the Guarantee Fund, Svitlana Rekrut, noted that state-owned banks do not have much time to bring their NPLs to the market: next year, there may not be any capital left in Ukraine ready to enter such assets. Do you agree with this assessment?

– If state-owned banks want to get the maximum price, they need to do it now. It took the fund several years to rock this market. They succeeded – there is interest. But who knows what will happen if you take a break for a year or a year and a half. Of course, the situation can improve. But I wouldn’t count on it too much.


“We do not need to turn the business into a pile of scrap metal”


– One of the most famous cases of the company “Investohills Vesta” – a long trial with the owner of the juice producer “Yabluneviy Dar” Taras Barshchovsky. He recently told Forbes that the parties had reached a settlement agreement. Can this story be considered closed?

– Not yet. We are negotiating. Therefore, I would not like to comment on open cases.

– You had a long and difficult trial with Barshchovsky – it turns out that he refused to negotiate until the last moment?

– In our business, negotiations are always going on, from the first day of working on a specific case. Unfortunately, society has got the wrong impression that collectors are aggressive companies that constantly attack debtors. But this is not the case. The basis of this business is a large and complex legal work, constant negotiations and attempts to reach a compromise. Another thing is that often our vision of resolving the situation is at odds with the understanding of debtors. They often see opportunities to “slip through” – you also need to understand that we get the most malicious defaulters from the Guarantee Fund. But even with such people, as a rule, it is possible to find common ground; the only question is how far you need to go before this. We really have come a very long way with Mr. Barshchovsky.

– Which scenario is most favorable for you in such cases? Debt restructuring, foreclosure, sale of a loan to a borrower on your terms?

– The most favorable scenario is to agree with the debtor on the amount that he is able to pay us based on the current capabilities of his business. The most unfavorable is when attempts to negotiate / achieve justice through the court harm the business and somehow negatively affect the work of the debtor’s enterprises. In this case, we risk being left without money, but with a pile of scrap metal. We definitely don’t need that.

– Who else owns the company?

– I can’t reveal my partner’s name. I can say that this is a Ukrainian businessman, not from the Forbes list, but quite well-known.

– Businessman Pavel Fuchs in an interview said that it was he who bought the assets of “Yabluneviy Dar”. So, you went into this case in his interests?

– No. Pavel participated with us in this particular case as a minority investor. At the same time, he withdrew from this investment a few months ago.

– How often do you attract third-party investors?

– When we see several promising cases. Then we attract financing for them, but so that we do not have majority investors.

– Are these Ukrainian companies?

– Not anymore. Since the middle of last year, we have been cooperating with several foreign funds.

– What kind of return can such an investment give?

– It depends on the level of risk in a particular case. As a rule, from 20 to 35% per annum. These are not cosmic returns. It is generally assumed that we earn money out of the blue – we buy assets for the hryvnia, and sell them for 100. But this is not the case. Using superhuman efforts, we can at best earn 1.5 from each hryvnia.