Is the third time actually a charm? Ukraine and its financial advisors will put that maxim to the test as they attempt to sell the Chornomorets arena on Sept. 26 after two failed attempts.
The State Deposit Guarantee Fund and its auctioning agent, the First Financial Network, have announced their third consecutive auction of the stadium in Odesa, a port city of nearly 1 million residents located 500 kilometers to the south of Kyiv.
The arena is just eight years old, having been built in the place of an old stadium for the UEFA Euro 2012 championship that Ukraine and Poland hosted.
Despite that, the starting price in the auction will be just Hr 733 million ($29 million). And because this is a Dutch auction, the price will go down. The predetermined minimum price is Hr 586 million ($23 million).
The arena went to auction after Ukrainian financial authorities declared Odesa-based IMEX Bank insolvent and took control of it. The Deposit Guarantee Fund is currently selling off IMEX’s assets to repay depositors in the defunct bank.
But the fund is struggling with Chornomorets: Not a single bidder showed up for the previous auction on Aug. 8.
That doesn’t surprise Taras Yeleyko, who is responsible for asset sales at the fund. The arena was a collateral on many unpaid loans. Even though the loans are included in the sale to secure the ownership rights of the buyer, there are legal risks. The previous owner could sue to get the property back.
“Naturally, it’s a ticket to war,” Yeleyko says of owning the arena.
Pricing conundrum
During the previous auction on Aug. 8, the First Financial Network (FNN) anticipated “strong interest from Ukraine and international investors” for the stadium, according to John Morris, the company’s president.
But the total absence of bidders hardly came out of left field for Yeleyko. On their own, stadiums do not generate revenue without their team. But the Chornomorets soccer club is not included in the sale.
Moreover, Chornomorets arena is not simply a soccer field of 34,000 seats. It also includes a hotel, fitness studio, business center, and several hundred underground parking spaces. This makes it a difficult asset to manage.
When the Deposit Guarantee Fund first attempted to sell Chornomorets in 2018, before partnering with FFN, it set the price at Hr 3.66 billion, roughly $130 million at the time. It is difficult to know the true value of the arena.
Back in 2010, the former owner of both Chornomorets and IMEX Bank, Leonid Klimov, explained that the Chornomorets soccer club obtained additional financing for the arena’s construction by issuing shares of the club. That was worth $37.5 million and 90 percent of it was intended for building the arena, Klimov told the Sport.ua news outlet.
Today, Klimov has lost ownership of the arena and IMEX, but still has the soccer club, which complicates the arena’s sale.
Still, the arena’s true value is not critical to the Deposit Guarantee Fund. Its main goal is to recoup losses by selling it, and it is less concerned about the end price.
“We have to ensure that the sale is honest, and to provide the buyers with enough information and time for decision making,” Yeleyko says. “And then the market will say how much it is ready to pay for the object.”
40 loans
It’s not only the arena and its amenities that will go under the hammer. The now defunct IMEX bank also issued 40 insider loans to borrowers who pledged the arena as collateral in their respective loan agreements.
Those distressed loans are being sold in the same lot with the Chornomorets arena. The Deposit Guarantee Fund grouped the loans and the stadium together in order to provide more security for the future buyers of the arena.
One can logically conclude that many of these loans are linked to Klimov and his business interests. According to a March 2017 report on the ubr.ua business news portal, IMEX Bank issued 90 percent of its corporate loans to insiders.
“An investor buying this asset will either be someone with big experience in real estate or a portfolio investor with knowledge of whom they hire for managing this asset,” says Yuriy Fedoriv, a director at KPMG Ukraine’s business consultancy. “If you do not see clearly what you do with an asset and what it earns, you will not be able to evaluate it.”
This undated photo shows the general view of Chornomorets stadium in Odesa. (Courtesy/ Wikimedia)
But Yeleyko trusts in the traditional Ukrainian saying: Every good has its buyer.
“There are investors interested in such assets,” he says. “Of course, these assets are somewhat cheaper than clean assets with a clean history. It has always worked this way.”
More precisely, these investors evaluate the risks, calculate what the asset is worth to them, and have “big armies of lawyers — serious and powerful ones,” Yeleyko adds.
Luckily, “ticket to a war” is only a metaphor and not the real thing.
“We have already overcome the heritage of the (brutal) 1990s…and such issues are mostly resolved in courts nowadays,” he says.
Seducing investors
The Deposit Guarantee Fund and the FFN encourage potential investors to register for its online data rooms and study the documents on the loans and arena.
So far, however, these people haven’t taken the next step: registering for the auction. The issue is what comes after the auction.
“One can buy this asset, and it’s an easier story if it is registered on the books of the bank,” says KPMG’s Fedoriv. “But if you need to recover it, this is a totally different procedure.”
“If you buy a loan, you become a creditor. In principle, you need to recover the pledged item. Experience shows that it is a very complex and costly procedure,” he adds.
Fedoriv suggests that the asset’s actual value is higher than its set price, but the recovery process makes this true price unattractive. After all, the new owner will likely have to hire professional legal consultants and maybe a foreign firm.
“And this comes at a price,” Fedoriv says. “The investors are starting to make such assumptions and these assumptions are lowering the price, the value of this asset.”
The arena itself is technically a clean asset as it is registered on the books of IMEX Bank, which is undergoing liquidation after a period of state administration.
But despite FFN’s efforts, there is no market — domestic or international — for the arena so far.
Future bidding will determine the price for the lot. If a buyer does not surface in September, the price will continue to fall.
“There are about 20 companies that studied the loans, the stadium. All Ukrainian buyers are waiting for the price to fall,” Andriy Khraban, FFN’s representative in Ukraine, told the Kyiv Post.
Intersection of interests
Another factor affecting the auction’s prospects is the “other side” of the table: Klimov, the former owner of the arena and IMEX Bank.
Klimov started his career as the director of a sports merchandise shop in Soviet times. Later, he became one of the most prominent businessmen in the port city.
Later, he got involved in national politics and was elected to the Verkhovna Rada multiple times, but never abandoned business. During his time in office, he built major real estate assets. And while serving on the Ukrainian parliament’s financial governance committee, he owned a major bank.
And Klimov won’t be the most difficult party the buyer will face.
The buyer will have to deal with city authorities, the Football Federation of Ukraine, the judiciary and even the management of the Chornomorets soccer club.
The Kyiv Post reached out to the Chornomorets soccer club’s press office by phone and email to contact Klimov. The club did not respond.
