Ukraine's government and business community should be closely following the financial collapse of Mriya Agro Holding. At stake, according to investors, creditors and industry players, is the ability of cash-starved Ukrainian companies to get financing in the future.
In particular, if financing is restricted to the fragile yet productive agricultural sector, a key driver of the nation’s economy and exports, Ukraine stands to lose billions of dollars in hard currency earnings. As creditors brace for the arduous process of recouping losses – Mriya (meaning “dream” in Ukrainian) has $1.28 billion in total debt – the government will be put to a test of integrity for ensuring courts rule fairly and that any misappropriation of funds is reversed.
Banks hold the biggest share of the company’s debt – $572 million, investment firms lent Mriya $472 million, while the International Finance Corporation provided $122 million and European export agencies gave as much as $109 million in loans.
Once the darling of investors and international lenders, creditors have called in nearly half of Frankfurt-listed Mriya’s liabilities, or $534 million. The demand for payment was done in an Oct. 14 notice of acceleration that Mriya published on the Irish Stock Exchange, where its two eurobonds are listed.
It was a clear sign that lenders are increasingly frustrated with Mriya, including its apparent unwillingness to restructure and keep the company a going concern.
Allegations are surfacing of gross mismanagement at the cultivator of more than 300,000 hectares (741,000 acres), mostly in the western part of the country. They include years of suspicious third-party transactions, inflated numbers for capital expenditures and biological resources and misrepresentation of financial figures.
Mriya blamed “unexpected” rising hard currency values – its loan portfolio is mostly in U.S. dollars – and commodity prices that have “fallen by nearly half.” The grower, furthermore, emphasized that it adheres to International Finance Reporting Standards while identifying Ernst & Young as the verifier of its financial statements for more than five years.
This explanation hasn’t satisfied lenders, however.
A bondholder committee that formed after Mriya failed on Aug. 1 to make $32.6 million worth of interest payments on its two Eurobonds has been wanting to see historical financial figures to ascertain what the farmer did with the money that caused it to default amid a harvesting season when it should’ve had available cash.
“It’s not about the price of grain or war (in eastern Ukraine), it’s about how they managed the money, that’s why we are talking about restructuring,” said co-head of Rothschild Bank in Russia and CIS Giovanni Salvetti, who represents the bondholders’ committee ,which holds more than 50 percent of the outstanding principal of Mriya’s $400 million 2018 eurobonds and approximately 15 percent of its $71 million 2016 notes.
So far, the grower hasn’t been sincere, bondholders say, by refusing to open its books. It initially suggested that it might engage investors promptly provided they waive the right to audit historical financials and transactions, according to Wilbur Matthews, CEO of Vaquero Global Investment, a Mriya bondholder. The most recent financial report that Mriya published on its corporate website dates to the third quarter of 2013.
“This is absurd and points to serious problems and suggests that the company has something to hide,” Matthews told the Kyiv Post. “To make this request…implies that the company is not yet prepared to engage forthrightly with investors and likely has not yet come to terms with the reality of their mismanagement of Mriya and the civil and criminal implications of their past actions, which likely include fraud.”
Mriya insists that it is acting in the spirit of openness when it published the creditors’ notice of acceleration on Aug. 14 “in order to maintain the transparency of (the) restructuring process for our lenders and all interested parties.”
The farmer maintained that the “harvesting campaign is on track, areas for winter crops are prepared, (and) sales of crops are fulfilled in line with existing contracts.”
Salvetti of Rothschild said he doesn’t expect Mriya to address the past at the next creditors’ meeting on Oct. 24.
“We will hear a nice story about the bright future but no words about what happened in the past…psychologically and legally it is useless to talk about the future without talking about and fixing the past,” he said.
Unraveling
After missing the initial interest payment, Mriya by Aug. 13 had failed to make approximately $130 million in amortization and interest payments.
More disturbing to investors is that the farmer appeared to have given guarantees of around $200 million to related companies outside the holding that belong to the Huta family consisting of Ivan and Klaudia Huta and their sons Andriy and Mykola Huta, who together own 80 percent of Mriya.
Two particular businesses, a sugar mill and a logistics company, are suspected of being highly dependent on Mriya for supplies and working capital financing, an uncommon practice across the industry, according to a 2012 company report by Millennium Capital.
Overall, the Huta family runs a commercial bank, a logistics operator, a Switzerland-based grain trader and several real estate assets, the bondholders’ Oct. 23 letter to President Petro Poroshenko and the government says. Meanwhile, the company has never ever paid dividends to shareholders since its $90 million private placement in 2008.
Promising to initially cooperate on restructuring the debt and conduct “business operations in the normal course,” Mriya is now in technical bankruptcy.
To help steer the company out of the crisis in August, New York-based Blackstone Group and Kyiv-based Dragon Capital were hired, only to exit the next month.
“We didn’t feel that we had a client – we were giving advice, but the company wasn’t necessarily following it,” Dragon’s managing director Brian Best told the Kyiv Post. “Debt restructuring is often about re-establishing trust between the company and the lenders, and in this case, the lenders wanted answers about historical performance and information on current cash flows. We felt that every day that we didn’t give some answers to lenders, the company and its advisors were losing credibility and the chances for a successful restructuring were becoming slimmer.”
Dragon Capital and Blackstone Group were replaced by global auditor Deloitte on Sept. 19, and Swiss-based SGS Group and law firm Bryan Cave were added as advisors.
Frustration with Mriya appeared to reach a crescendo when the debt was demanded in what is called a “notice of acceleration” earlier this month.
“To restructure you must have trust, it’s a painful process,” said OTP Bank CEO Tamas Hak-Kovaks, whose subsidiary OTP Leasing loaned Mriya $23.36 million, of which over Hr 39 million is outstanding through leasing agreements for agricultural equipment. “But it appears they (Mriya) aren’t ready to create trust; they are not ready to talk about the past and show what happened,” the banker said.
Meanwhile, Mriya’s newly appointed chief financial officer Oleksandr Chernyavsky says the company will resume servicing its debt in November.
Years of red flags
Somehow Mriya’s auditor Ernst & Young of at least five years, lenders like the World Bank’s for-profit arm, the International Finance Corporation, as well as underwriters and lawyers all missed signs that the grower’s performance was too good to be true.
Its unique track record of achievements includes boosting planted area by 10 times in 2007-2011, and increasing sales by 16 times for the same period, according to a July 2012 report by Millennium Capital.
“Despite the explosive growth, margins remained consistently high and far (above) competitors. Since 2008, Mriya’s earnings before interest, taxes, depreciation and amortization margin averaged 63 percent…This is twice (beet sugar producer) Astarta’s 30 percent, although both have comparable business models,” reads the report.
EY declined to provide comment, citing “confidentiality policies,” while the IFC didn’t respond to emailed inquiries.
As far back as 2010, Canadian-citizen Bohdan Chomiak, director of executive strategy at Ukragroconsult, said he noticed sore points while conducting due diligence for two potential international investors whom he wouldn’t name for confidentiality reasons.
After the third day he stopped and advised against investing because, among other observations, he noticed numerous third-party transactions that “resembled transfer pricing either to reduce the company’s tax liabilities or transfer profits to another legal entity – it was like a Ponzi scheme.”
The Millennium Capital report said that the grower purchased rights to derelict farmland at $411 per hectare in 2009 at the height of the financial crisis at above market price, and then $1,501 per hectare for 66,000 hectares two years later when the average price was $289 per hectare.
Thus, Mriya spent up to $188 million on land additions in 2011, which was the equivalent of 75 percent of the money raised in its 2011 eurobond placement.
A Sept.25 note to investors by Empire State Capital Partners, moreover, questioned the farmer’s application of the accounting principle for biological assets – living plants and animals – on its financial statements, suggesting they were “flawed” and their use “problematic.”
“We suspected they were inventing numbers over the years, people obviously felt they were cooking the books, but we never knew the extent of it,” Empire State Capital managing director Alex Bart told the Kyiv Post.
Mriya told the Kyiv Post that its biological assets’ assessment was “conducted at fair value in accordance with international standards of financial reporting to which Mriya Agro Holding strictly adheres.”
In practice, OTP Leasing, which gave the holding 60 contracts for 615 units of agricultural machinery, said payment delays started in late 2013. In May, Mriya stopped paying altogether.
“There is an integrity risk – they don’t want to save the company; they are not letting us repossess the machinery,” said OTP Leasing CEO Andriy Pavlushyn.
Propensity for risk
Mriya’s default at once highlights what a difficult investment environment Ukraine is and why loan rates are high, reflecting the risk and market volatility. There is currently $6.3 billion in Ukrainian corporate eurobonds.
Should the grower’s default go unpunished, it could set off a domino effect.
“It is in everyone’s interest to get this right; there are other bonds of Ukrainian entities and loans maturing in the next two years so you don’t want to have negative precedents,” Salvetti of Rotschild said.
Moreover, it means that banks are definitely weary, lenders are going to start looking deeper and through a bigger magnifying glass at Ukrainian companies, AgroGeneration CEO John Shmorhun told the Kyiv Post.
Unicredit Bank, which lent Mriya $75 million, told the Kyiv Post that the farmer’s case is “strongly affecting the risk appetite versus Ukraine,” the financial institution’s CEO in Ukraine Graziano Cameli told the Kyiv Post. “We can understand clients suffering from major disruption or clients impacted by economic and financial crises. We cannot tolerate misbehavior because it destroys the main value in the banking environment: mutual trust.”
The company’s share prices fell by almost 10 times since January. Nobody expects any return on the stocks, especially given the four-year low for wheat prices and five-year low for corn. Both commodities are at the core of Mriya’s business model, occupying 80 percent of the crop mix.
Official intervention?
Bondholders told the Kyiv Post that the Agricultural Ministry has been involved at Mriya and is aware of the situation’s significance. The agricultural ministry didn’t respond to a Kyiv Post request for comment.
On Oct. 23, bondholders released an open letter to Poroshenko and the government, accusing Mriya’s management for not engaging in a “constructive dialogue” with lenders.
“According to the information that we possess, the process of passing Mriya’s farmland to a third party is taking place,” reads the petition.
Rothschild’s Salvetti said the government could influence the actions of Mriya’s shareholders to ensure they don’t take harmful action against the company since the firm – particularly the four Huta family members — still control its cash flow.
“The main objective is to preserve the company,” he said, adding that restructuring is still possible only if everyone cooperates. “If assets start going in a strange direction and this thing blows up, this is bad for the economy.”
This could explain why the Cabinet of Ministers on Oct. 13 suspended Vladyslava Rutytska, the former deputy CEO of Mriya, less than a month after she was appointed deputy agricultural minister in charge of European integration matters.
Kyiv Post editors Mark Rachkevych and Ivan Verstyuk can be reached at [email protected] and [email protected], respectively.
