Why doesn’t Oschadbank sell the Gulliver shopping center, which is collateral for the problem loan?
Recently, the media has often mentioned Viktor Polishchuk, the ultimate beneficiary of the company that owns the Gulliver office center in the center of the capital.
This borrower a long time ago, back in 2006, received a loan from state banks for the construction of this office and shopping center (by the way, at the time of receiving the loan, the company that received the loan had other owners).
The accusations against the person involved in the articles are varied, and their analysis is not the subject of this column. State banks also get it, which, according to the media, set this borrower an abnormally low rate during the restructuring process.
These authors also write that the management of state-owned banks simply turned a blind eye to the borrower’s almost year-long failure to fulfill financial obligations after the start of a full-scale invasion and did not apply any penalties, although they had such tools. It is precisely these moments that, in my opinion, are worth commenting on.
As already noted, the loan was issued in 2006, and almost entirely it was received in foreign currency. This became the key problem with this loan. The situation of this debtor is no fundamentally different from thousands and thousands of other problem debts in banks in the US, Europe and around the world, which issued risky loans despite the possible economic risks of the real estate market.
In the 2000s, everyone took out such loans - both companies and citizens. Currency stability, as it was believed then, would last for a long time, and real estate would constantly increase in price. Two wrong assumptions that led to disaster.
The crises of 2008 and 2014 dealt an irreparable blow to businesses that were financed in foreign currency. In addition to a significant increase in mandatory payments in terms of hryvnia, demand has fallen - people have become poorer.
How financial restructuring works during martial law
Half of the banks' loan portfolio became a problem debt, and a huge number of bankruptcies occurred. At the same time, the legislator actually froze the issue for individuals for a long time (by prohibiting the forced alienation of their residential property, and then by allowing partial forgiveness of such debts).
Businesses and banks were asked to solve problems with the help of the financial restructuring law.
After the 2014 crisis, when the debt increased many times due to the devaluation of the hryvnia, the debtor was unable to fulfill the terms of the contract in full. The problems were exacerbated during the pandemic, as stores and offices were operating at limited capacity at the time.
The loan was restructured in 2020 (as mentioned in investigative journalism) in accordance with the Financial Restructuring Law.
Let me remind you that this law was developed at the initiative of the IMF, representatives of the EBRD and the World Bank took part in its development, and the best world practices were taken as a basis. It was developed specifically to soften the requirements for debtors (in terms of rates, loan repayment terms, even partial debt forgiveness, etc.) due to financial difficulties.
To ensure that the restructuring process takes place without abuse, the law provides for special safeguards. One of them is the participation of third-party independent experts in the restructuring process. In this case, world-famous companies were involved - Rothschild, KPMG and others.
New interest rates and loan terms were not taken out of thin air - they were the subject of careful calculations. It is based on the cash flow of the business (existing and projected). Experts also determined how much of this flow the borrower can use to service the debt, since the premises of the shopping and office center need to be maintained in working order, and these are expenses.
The indicators of the term and rates are interconnected - the logic is that these parameters do not kill the business, but give it the opportunity to continue working and repay the entire debt. The main goal is to ensure maximum economic benefit for creditor banks in these difficult conditions.
The new loan rate mentioned in the media after restructuring (3.68%) is not abnormally low (as some media wrote), but the maximum possible, given the incredible amount of debt, which is approximately three times the market value of the building pledged as collateral for the loan, according to as of 2020.
The same applies to the new term of the transaction, because it was simply unrealistic to pay off the entire debt in a shorter period of time. All this was confirmed by calculations and conclusions of the mentioned international experts.
By the way, the Rothschild company even suggested that creditors consider the scenario of forgiving part of the debt in accordance with Western practices, since the amount of debt was incomparable with the business opportunities of the shopping and office center. However, the creditor banks did not agree to this.
During the restructuring, the contractual basis was brought to the requirements of the current legislation, which strengthened the position of the banks, and also, as already mentioned in the media, a personal guarantee of the beneficiary was issued under Ukrainian law and under the law of England (with a rule on resolving disputes in the London Arbitration Court).
Also, during the restructuring, part of the loan was transferred to hryvnia. Unfortunately, at that time, the currency position of banks did not allow for complete conversion of the debt into national currency, so now approximately half of the debt still remains denominated in foreign currency and banks cannot carry out the conversion due to existing restrictions established by regulations in force in period of martial law.
The terms of the restructuring were approved by the supervisory boards of two state-owned banks that were created as part of the corporate governance reform. The majority of each supervisory board was independent directors, international financiers with an impeccable reputation.
The banks' decision was approved by the working group on problem loans of the Financial Stability Council, which includes heads of the NBU, various financial departments and international experts.
Representatives of law enforcement agencies were also present at its meetings. The restructuring plan fully complied with the requirements of the mentioned law in terms of rates, payment terms, etc.
Since the conclusion of the financial restructuring plan, the borrower adhered to the terms of the restructuring until the beginning of 2022. The outbreak of a full-scale war negatively affected all borrowers of all banks (from individuals to large corporate clients).
During this period, almost all Ukrainian banks provided their clients with credit holidays, and then there was a gradual process of resuming payments for loan servicing. The fact that the facility is located in the city center did not save it from a drop in revenue at the beginning of a large-scale war.
The receipt of funds fell 20 times, the office part was empty, and the retail part had a grocery supermarket and pharmacy. At the same time, the facility had to continue to be maintained, that is, incur expenses that in the first months of the great war exceeded revenues.
For the duration of martial law and for a 30-day period after its termination or cancellation in accordance with the law, all borrowers, both legal entities and individuals, are exempt from any liability for untimely debt service, including fines, penalties, inflation losses, for late loan repayment and /or payment of interest.
In accordance with the regulatory assets that govern the process of banks working with problem debts, the choice of a resolution instrument with any borrower must be done by comparing the net cash flow that a specific resolution instrument gives the bank.
Accordingly, the bank must choose the strategy that provides the bank with greater cash flow from the implementation of the scenario. As in most such cases, a restructuring arrangement is the best possible way out of a very bad situation.
This debtor did not have and does not have any privileges among many problem debtors, of whom, unfortunately, there are still a lot in state banks (this is our legacy from past crises).
All economic calculations have indicated and indicate that instruments of forced debt collection are two or three times less profitable for creditor banks. The process of foreclosure is lengthy, it usually leads to the termination of all payments to the bank and negatively affects the business itself.
The demand for problem loans, especially such large ones, is now extremely low. In addition, a full-scale war has significantly reduced the value of real estate, investors take into account military risks and economic prospects. So, if we sell collateral or a loan, at best we can only get a quarter of the existing debt.
What is happening now and how do we see a way out of this situation? Simultaneously with the gradual restoration of business activity, since last year the borrower has returned to debt servicing in accordance with the economic logic of the reached agreement on restructuring.
If there are no fundamental shocks in the state, from the beginning of next year the borrower will be able to fully resume servicing the loan. Fresh news adds optimism - the return of the retail giant Inditex (boutiques Zara, Massimo Dutti, etc.) to Ukraine.
It is also expected that over the next three years the debtor will be able to pay off part of the debt that he was unable to pay at the initial stage of the war, when everyone was not in the mood for visits to shopping centers and offices were closed. We demand the return of this part of the debt as well. The case is carefully monitored by the supervisory board of Oschadbank and is subject to supervision by the Financial Stability Council.
If the regulator eventually cancels the rule on the impossibility of transferring debt from foreign currency to hryvnia, and allows this tool at least for debtors in critical financial condition, this will be an important step for the overall stabilization of the situation with the return of this, as well as other similar debts in foreign currency.
Once again, I want to emphasize that both now and in the future, Oschad, when making decisions on such complex cases, will always focus exclusively on the interests of the state bank, determined by economic feasibility. We understand well that now the state treasury needs taxes and dividends from us more than ever before.
