Bank of England recognizes Privatbank bail-in

The Bank of England decided to recognize the bail-in of
Privatnank and the UK Treasury provided its approval of this decision, the
regulator reported on May 14. The request to recognize the bail-in was filed by
the National Bank of Ukraine (NBU) in 2017 which aimed at legalizing the
conversion into equity of three issues of Privatbank (PRBANK) Eurobonds for a
total remaining par amount of USD 555 mln, which were issued under English law.
The recognition gives effect to the bail-in of the Eurobonds as a matter of
English law, the regulator commented.

Recall, based on the ruling of the London Court of
International Arbitration of July 2019, Privatbank was obliged to repay its two
Eurobonds which were due in 2018 (total remaining par value of USD 335 mln) to
certain bondholders only in the case that Bank of England does not recognize
the bonds’ bail-in. All the Privatbank Eurobonds were bailed in as a part of
the bank’s bailout and nationalization in December 2016.

Alexander Paraschiy: The logic
behind the Bank of England’s decision is far from being perfect, so the ruling
is an unexpected event to us. We understand that the regulator took “public
interest” and “financial stability” pursued by the bail-in of Pivatbank
Eurobonds as a top priority, closing its eyes on discrimination of the
bondholders compared to the same class of creditors, as well as inferior
transparency of the process, as compared what would be expected in a UK bail-in
process.

The ruling means the holders of PRBANK 2018 bonds have
lost their litigation in UK courts against the bail-in, thus significantly
decreasing the chances for the recovery of the bondholder’s rights in the UK
jurisdiction. With the chance to recover the bonds in the UK looking much
smaller now, the bondholders still may try to do it in Ukrainian courts.

As an externality from the recognition, this may
complicate new international bond placements for any Ukrainian private and
systemically important bank, as well as systemically important banks from other
jurisdictions.

At the same time, given the decreased probability of
Privatbank’s repayment of its Eurobonds, this raises the market value of the
bank ahead of its possible privatization in the mid-term.