Starting five years ago, Ukraine was forced to take half its banks off the market. This left more a huge volume of assets that needed to be disposed of.
The Deposit Guarantee Fund has been working to liquidate these assets. Despite the global pandemic and the associated drop in liquidity and capacity to buy, demand for the assets has remained steady, according to the fund. Most banks are coming up on their five-year liquidation deadlines.
“We will be finishing up our sales,” said Olha Bilai, the asset management director of the fund. “There will be many assets on the market.”
But several major problems still haunt this process. The banks’ former owners, who shouldn’t have legal access to their old assets, can easily buy them through intermediaries.
Certain bidders have been able to manipulate the bidding process with the alleged complicity of the exchanges where the auctions take place.
And thirdly, Ukraine’s poor court system continues to open the gates to large-scale legal harassment, which raises risk, pushes down prices and deters more investors from participating.
Some cause for optimism
Bilai said that contrary to expectations, demand for assets under liquidation remains strong.
While the COVID‑19 epidemic initially brought down demands due to lower liquidity and uncertainty in the market, this lasted only several weeks before it recovered. Between November and May, the fund sold Hr 7 billion ($256.6 million) worth of assets. In all of 2019, the fund sold Hr 8 billion ($300 million).
Still, real estate, especially in central Kyiv, remains among the most popular asset classes, as are others that can start generating a cash flow right after purchase. Foreign investors also like mortgage portfolios, as they’re easy to understand compared to companies that require a lot of digging for information. Well-secured asset portfolios have had good demand as well.
The most successful auctions for the year included Nadra Bank’s office building in the center of Kyiv at Hr 306 million ($11.2 million); the credit portfolios of legal entities owned by VTB and VAB banks at Hr 240 million ($8.8 million); and separate credit portfolios of entities owned by VAB bank at Hr 234 million ($8.6 million).
And of course, there is the Chornomorets Stadium in Odesa, formerly of Imexbank, at Hr 193 million ($7.1 million) — American firm Allrise Capital Inc agreed to buy it, although the agreement has not yet been finalized.
By law, the fund has five years to dispose of a bank’s assets. Because most banks were taken off the market in 2015 and 2016, many have come up or will be coming up on their limits. In these situations, the fund often groups a bank’s leftover assets into a “one bank, one pool” portfolio and sells that.
Thanks to the new banking law signed by President Volodymyr Zelenskiy in May, the fund now has more ways to extend this deadline if some assets cannot be sold before it runs out.
Ruslan Chorniy, head of market research firm Financial Club, said that the market has seen more independent buyers and foreign players, possibly drawn in last year by optimism about the new president and the prospect of reforms.
But it’s not all that great.
Legal risks
Ukraine remains plagued by its number one problem in this arena — legal risk. No buyer can be sure that third parties will not challenge their purchases in courts. And no one can rely on Ukraine’s courts to be impartial. Even a best-case scenario can involve a sale being dragged out for months and months while either the fund or the buyer deals with legal harassment.
Interested parties can bring court proceedings to invalidate the bidding result (for instance, on the grounds that the bidders did not comply with the tender requirements).
They can also challenge the mortgage or pledge agreement based upon which the property was collected by the insolvent bank, according to Igor Krasovskiy, a banking and finance partner at Integrites law firm.
If the winner of the e-bid loses, this might give the third party grounds to contest the registration of the title to the acquired property of the insolvent bank and restore the title of the previous owner of the property, Krasovskiy added.
The Chornomorets deal is no exception. On June 12, the Shevchenkivsky District Court of Kyiv placed an arrest on the property, preventing the sale from moving forward, the Deposit Guarantee Fund reported.
“The most surprising thing in the actions of the judge’s investigator is the fact that it was he who had previously canceled the arrest of other assets of Imexbank JSC,” the fund said in a statement. “At the same time, the arrest of the stadium was repeatedly recognized as illegal by the decisions of the Kyiv Court of Appeals.”
Chorniy said that situations like these lead to buyers abandoning the deal. This also affects the prices of these assets, making them lower than in Europe, due to high legal costs.
“It can be a substantial barrier for potential investors, which can entail a drawback from acquiring of property (assets) of an insolvent bank,” said Krasovskiy.
Controlling parties
The fund can run an insolvent bank directly or delegate control to an employee. This controller runs the bank’s operations, with the exception of arranging asset sales.
Andrii Ianitskyi, a journalist and economist who focuses on banking, said that the high degree of independence these controllers have presents a bigger corruption risk than direct management of the banks by the fund.
In May, the Kyiv Prosecutor’s Office charged a former fund official with the embezzlement of Hr 19 million ($701,450) by abusing his official position.
According to an investigation, the controller falsely claimed that there were no outstanding debts to AKB Bank from individual lenders. As a result, encumbrances were lifted from property that was being held in collateral, which led to the bank losing these assets.
Bilai said that the fund has taken steps to limit corruption risk by individuals by creating a collegial decision-making process with regard to various aspects of running the insolvent banks — the controller has to come in and get consent within the fund.
Manipulating the auctions
Auctions for assets on sale take place on exchanges that are linked to transparency database Prozorro. Buyers may register through an exchange — to be eligible to submit a bid, they must first pay a deposit.
But this is not always done. In some cases, the bidders do not provide a deposit, promising instead to pay up in the future or pretend to have paid already. This should not be possible unless the exchange lets it slide.
Ianitskyi said that there have been numerous cases where this enabled buyers to manipulate the auction. One bidder might make a very high bid and then fail to follow through, leading the asset to go to the second-highest bidder, often a related party.
“In this way, they weed out the competition,” he said.
Ianitskyi and Chorniy said that, in many cases, this technique is used by parties connected to the banks’ previous owners, who use front companies to either disrupt an auction or to acquire the asset for themselves.
In January, the fund announced it had stopped an auction for an asset pool with an anchor asset of a loan with the Kremenchuk meatpacking plant as collateral. The fund discovered that the winning bidder hadn’t paid the bid deposit, possibly with the knowledge of the Universal Commodity Exchange, where the auction took place.
The winning bidder, Businessresource Ukraine, submitted a bid of Hr 304 million ($11.2 million), twice as much as the next highest, Investohills Vesta.
Businessresource appears to have no previous economic activity, whereas Investohills is known for being one of the most litigious companies in Ukraine, which has been aggressively buying up debts related to fallen banks. According to Delo.ua, the former managers of Delta Bank are advising Investohills in its attempt to gain control of Delta Bank’s assets.
According to Bilai, this case was sufficiently outrageous to spur reform. To prevent exchanges from allowing manipulation, they are being forced to undergo re-accreditation and submit their own deposits to remain in good standing. The re-accreditation is already under way. The fund is also checking on the presence of bid deposits for major auctions.
With the bid deposits secured, even if former owners use multiple bids to disrupt auctions or win the assets, that will still result in more money going to the creditors and depositors of these banks.
A VTB Bank stands shuttered on Pushkinska Street on Feb. 3, 2017. The Ukrainian branch of the Russian bank was declared insolvent and its assets are undergoing liquidation to pay back its creditors and depositors as much as possible. Since the start of the year, several pools including VTB assets have been sold at auction by the Deposit Guarantee Fund. (Pavlo Podufalov)
Former owners
Experts have told the Kyiv Post that even after the fund gets an asset pool for sale, there are dubious legal operations that can take the most interesting assets out of the fund’s control in favor of people associated with the former bank owners.
Intermediaries that operate on former owners’ behalf are usually lawyers. Sometimes, an asset might go through multiple sales after the initial auction, in order to conceal its trace.
While the fund acknowledges that, in many cases, former owners get their hands on the assets, its job is to try to get as much money back for creditors and depositors as possible, said Bilai. “It’s a colossal problem,” she said. “But it’s a problem for law enforcement agencies… we, the fund, cannot fight it alone.” Bilai said investigations should be the job of the police and the courts.
Unforturnately, law enforcement and courts have not followed through on any major investigations in the banking sector for years.
Banking law
The banking law signed in May is known as the “anti-Kolomoisky law” after billionaire oligarch Ihor Kolomoisky, whose alleged $5.5 billion embezzlement collaped PrivatBank, forcing the state to take ownership in 2016. The law’s main provision states that once a bank has been declared insolvent, its liquidation cannot be prevented and its former owner cannot reclaim it. An independent auditor would decide compensation for any bank that a court declares to have been improperly liquidated.
The law significantly improves the work of asset liquidators by cutting down on the amount of slogging through legal challenges they are forced to do.
However, this law has recently been taken up by the Constitutional Court of Ukraine, which doesn’t have the best reputation. Krasovskiy said that, if the Constitutional Court rules against the law, this should not affect banks that were taken off the market between 2014 and 2018.
However, if the court strikes down the law, “it may result in additional pressure on the Ukrainian court system and the initiation of a number of new court proceedings,” he said.
