IMF does not rule out Privatbank nationalization, bondholder “bail in”

The IMF called for measures for the “possible resolution of systemic banks” – an indirect reference to the troubles facing Ukraine’s largest private commercial bank Privatbank (PRBANK) –  as part of its second review of the External Funds Facility made public on Oct. 3. Among these measures is the bank’s possible nationalization, in which case the Ukrainian government will have to inject needed capital in the form of state bonds. Leading up to that, “shareholders will be completely diluted,” the review said. Privatbank is one of three banks qualified as “systemic,” besides the two state banks.

The nationalization risk raises questions about what the government would do with the holders of Privatbank’s Eurobonds. Before state funds are injected into the bank, “non-deposit unsecured creditors and related deposits will be bailed in,” the review’s staff report said, referring to the process of writing off bondholder debt in order to keep the bank operating. This means the IMF suggests that all the Eurobond holders will be bailed in. However, in another section, prepared by the Ukrainian side, a “bail in” of only related parties was mentioned. 

The review also reserves the possibility for the government to issue UAH 152 bln in state bonds to recapitalize the bank and finance the State Deposit Guarantee Fund in 2H16. That’s a much higher amount than the UAH 60 bln that was spent for such purposes in 2015-1H16, indicating that the 2016 figure assumes an increase of Privatbank’s capital with state contributions.

Alexander Paraschiy: The risk of a high need for a state bailout of Privatbank is not new. In the previous IMF review in August 2015, a high amount was also reserved for the issue of state bonds for the bailout of banks and the deposit guarantee fund in 2H15. Of the earmarked UAH 134 mln for 2H15, only UAH 11 bln were used. However, this time the risk for nationalization of Ukraine’s biggest bank looks higher than a year ago, when the bank was only in the process of confirming the results of stress tests with the central bank. This year, it’s time to deliver some results of the approved recapitalization program, and we see no proof from the bank that it’s on time.

Recall, Privatbank’s key shareholder Igor Kolomoisky confessed last year that the bank’s possible capital gap could be as high as UAH 128 bln. And we think this number could be close to reality. In 8M16, the bank partially addressed the capital gap issue by claiming to have repossessed collateral worth UAH 43 bln. On Sept. 14, the NBU reported that the total effect on the equity of Ukraine’s top-18 banks from operations with collateral and debt repayments was UAH 30.4 bln. This may include a UAH 1.28 bln effect of First Ukrainian International Bank, which claimed it had completed its recapitalization solely by operations with bad debt and collateral. That means the effect on equity from operations with collateral conducted by Privatbank (as of mid-September) was no more than UAH 29.1 bln, indicating its remaining potential capital gap may be as high as UAH 99 bln.

At this stage, it does not look likely that the bank’s owners and borrowers are ready to contribute equity and collateral to the bank for such an amount. We also note that the bank had to obtain additional collateral for a significant part of loans by Sept. 1, 2016, and there is no information that it managed to do that. All this means that the risk of Privatbank’s nationalization in the short term is really high.

The nationalization scenario promises few positives for bondholders, who may be asked to “bail in” and share the bank’s losses. All this supports our view that the bank’s Eurobonds are highly risky.