Erste Group Bank has successfully sold a Ukrainian portfolio, consisting of €240m of corporate loans and €95m of commercial real estate (CRE), at a significant discount to nominal value. The transaction comes at a time when investor interest in Ukraine is gaining traction (SCI 25 August).

The portfolio sale was facilitated by Exito Partners and Cohen & Co. The investor base included both domestic and international credit and hedge fund investors with a focus on distressed emerging market opportunities.

“We ran a highly competitive sales process approaching over 200 investors, signing over 20 NDAs, delivering 14 indicative bids and taking five-plus-five counterparties on each portfolio into a final binding bid phase,” says Cohen & Co Managing Director Saleem Arif.

Erste Group Bank began its Ukrainian exit in 2013 when it sold an unprofitable local lender that it had bought just six years earlier, and the bank has made significant progress in cleaning up its balance sheet in recent years. Within 1H17 the bank’s NPL ratio has improved to 4.7%, compared to 4.9% in 1Q17 and 5.8% in 2Q16. The NPL coverage ratio remained stable at 68.5%.

The successful sale strategy centred on explaining to investors the exit story and the upside potential of the underlying assets. Arif observes: “When we started the process there was a lot of negative feedback on Ukraine and we thought we may not have enough investor interest. However, it transpires we were able to excite the market and eventually signed 22 NDAs.”

Many of the corporate loans within the portfolio were large-cap credits, with historic secondary trading in the bonds and loans and with loan agreements under English, Austrian and Cypriot Law booked offshore. These were well-known credits such as DTEK, Metinvest, Mriya, Donetsk steel and other credits which were originated by the European Bank for Reconstruction and Development (EBRD), where Erste was a B lender.

Exito Partners and Cohen & Co used a competitive sales process. This delivered a sale price that was higher than the seller’s expectations and also significantly higher than several investment bank trading desks had previously quoted the loans.

Cohen & Company has since worked on three further portfolio sales, including a €100m sale for Raiffeisen Bank subsidiary Aval Bank and a €130m deal with Intesa San Paolo subsidiary Pravex Bank.

Most notable is a mandate, shared with Exito, to sell an NPL portfolio for the EBRD.

“Selling an NPL portfolio does not imply that the EBRD is no longer committed to Ukraine, and in fact the EBRD is still doing business in that jurisdiction”, notes Cohen & Co Managing Director Michele Del Bo. “The transaction was in a sense inevitable after the bank explored all restructuring options, so they are fulfilling their mandate by facilitating more specialised lenders/investors to take over those positions”.

The market has its challenges, however. Legal enforcement of the collateral can take anywhere from three to 10 years. “In such cases the only viable solution for investors are out of court settlements, by reaching a consensual agreement with shareholders and stakeholders to avoid costly and time consuming court procedures”, observes Arif.

Currency controls for investors who want to repatriate foreign currency out of the country also pose a significant challenge. This applies between onshore and offshore parties, rather than between two offshore parties.

Moreover, according to domestic law, interest on loans can be repatriated on an annual basis if an investor has invested onshore. “There are solutions available but it requires sensible structuring”, notes Arif.

Sales in the Ukrainian NPL market are mainly government-driven, with US$15bn of NPLs having already been transferred onto the sovereign’s balance sheet and earmarked for sale. The government is committed through the Deposit Guarantee Fund to sell this amount over a three-year period.

According to World Bank data, Ukrainian NPLs as a percentage of gross total loans have increased markedly from 3.9% in 2008 to 30.5% in 2016, with the bulk of the portfolios lying with state-owned banks. However, the central bank – National Bank of Ukraine (NBU) – puts the number at a much higher ratio of 57%, as of April 2017.

Stelios Papadopoulos