Risks re­main high for lenders in Ukraine’s agri­cul­tural sec­tor T

Mriya de­fault

Kyiv Post Legal Quarterly - - News - By Ber­met Talant ber­met.talant@gmail.com

he fail­ures of Mriya, Creative and Ukr­land­farm­ing agro­hold­ings to pay their debts have made some lenders wary of the sec­tor.

Ukraine's agri­cul­tural sec­tor is one of the big en­gines driv­ing the econ­omy, but cred­i­tors con­tended with all sorts of calami­ties in the last three years – rev­o­lu­tion, war, eco­nomic re­ces­sion, high in­fla­tion and cur­rency de­val­u­a­tion.

These fac­tors, along with par­lai­ment's re­fusal to lift the mora­to­rium on sales of agri­cul­tural land, have clouded fi­nanc­ing prospects. With­out land as col­lat­eral, the 10 largest Ukrainian agro­hold­ings, which con­trol 2.1 mil­lion hectares of land, have had to turn to other sources of fi­nanc­ing. Mriya, the Ternopil-based agro­hold­ing that con­trols 180,000 hectares of land in western Ukraine, high­lights the trou­bles. The com­pany went pub­lic on the Frank­furt Stock Ex­change in 2008. In Au­gust 2014, it de­faulted to cred­i­tors. The pre­vi­ous own­ers, the Huta fam­ily, are sus­pected of si­phon­ing the money abroad through a net­work of offshore firms - the al­leged scheme came to light in the Panama Pa­pers scan­dal in April. The Hu­tas fled Ukraine, leav­ing Mriya with $1.3 bil­lion in debt.

Since then, the new man­age­ment ap­pointed by Mriya’s cred­i­tors and bond­hold­ers has been try­ing to pre­serve the agro­hold­ing, re­pay the debt and re­turn the as­sets il­le­gally seized by

agro­com­pa­nies tended to abuse in­ter­na­tional ac­count­ing stan­dards. They ei­ther over­re­port ex­pected crop yield and mar­ket prices and show high op­er­a­tional rev­enues from un­har­vested crops.

Or they con­ceal from their fi­nan­cial state­ments some of their as­sets with large debts, like it was in Mriya; or, as it hap­pened with Creative, they doc­u­ment over­es­ti­mated or even non-ex­is­tent as­sets as col­lat­eral for bank loans.

Ukr­land­farm­ing’s un­cer­tain fu­ture Lately all eyes have been on Ukr­land­farm­ing, the largest agri­cul­tural hold­ing, which con­trols 670,000 hectares of land. Not so long ago it was ex­pected to go pub­lic, but can­cel­la­tion of tax re­lief and eco­nomic re­ces­sion hurt busi­ness. In ad­di­tion, two banks – VAB and Fi­nan­cial Ini­tia­tive – that be­longed to its owner Oleg Bakhmatiuk went bank­rupt in 2015.

The NBU filed five law­suits against Bakhmatiuk, who acted as the guar­an­tor for his banks’ loans, to re­cover debt worth Hr 10.9 bil­lion ($419 mil­lion) and had his prop­erty frozen by the court ap­proval. He also owes Hr 5.3 bil­lion to the state banks.

“The NBU will take all mea­sures within Ukrainian law to re­cover the debt on re­fi­nanc­ing loans from the in­sol­vent banks at the stage of liq­ui­da­tion, as well as from their sureties,” the NBU press ser­vice said. The cen­tral bank claimed that Bakhmatiuk was us­ing “semi-le­gal meth­ods to evade its li­a­bil­i­ties, such as foot-drag­ging on le­gal pro­cesses.” Bakhmatiuk, in turn, ac­cused the NBU and its gov­er­nor, Va­le­ria Gontareva, of at­tempt­ing to de­stroy Ukr­land­farm­ing.

In Oc­to­ber, Bakhmatiuk told In­ter­fax-ukraine that he was ready to sell the com­pany over the con­flict with the NBU. Ear­lier in April, Ukr­land­farm­ing re­ported suc­cess­ful talks with Deutsche Bank, Rus­sian Sber­bank and eu­robond hold­ers on re­struc­tur­ing more than a half of its $1.7 bil­lion debt.

Bakhmatiuk is un­der crim­i­nal in­ves­ti­ga­tion now. He could not be reached for com­ment.

Alexan­der Paraschiy doubted that Mriya’s sce­nario would work for Ukra­land­farm­ing.

“First, Mriya Plc. was of­fi­cially reg­is­tered in Cyprus, while most of the as­sets of Ukr­land­farm­ing are reg­is­tered in Ukraine. This means for­eign cred­i­tors will have to lit­i­gate in Ukraine. Sec­ond, we can wit­ness how dif­fi­cult it is to lit­i­gate with Bakhmatiuk – the NBU has won some law­suits against him, but the court de­ci­sions aren’t be­ing ex­e­cuted for some rea­sons,” he said.

The res­o­lu­tion of these dis­putes to a large ex­tent de­pends on debtor com­pa­nies’ abil­ity to ne­go­ti­ate with their cred­i­tors as well as re­lies on com­pli­ance with leg­is­la­tion and ex­e­cu­tion of the ju­di­cial or­ders.

Volodymyr Igo­nin of Vasil Kisil & Part­ners said that Ukrainian leg­is­la­tion on debt re­struc­tur­ing is in­ad­e­quate. Still, the Ukrainian le­gal frame­work is be­ing changed to com­ply with a com­mon busi­ness prac­tice of the de­vel­oped mar­kets.

Com­pre­hen­sive le­gal due dili­gence pro­vides a prospec­tive lender with an un­der­stand­ing of the com­pany's as­sets and li­a­bil­i­ties, as well as avail­able col­lat­eral for loan re­pay­ment. The high level of im­ple­mented cor­po­rate gov­er­nance can be an­other in­sti­tu­tional safe­guard from wrong­do­ings of the man­age­ment and par­tic­u­lar own­ers.

“Our prac­tice shows that strate­gic cred­i­tors may rec­om­mend or even in­sist on im­ple­men­ta­tion of the best prac­tice of cor­po­rate gov­er­nance (e.g. a pow­er­ful su­per­vi­sory board with in­de­pen­dent di­rec­tors, risk-man­age­ment pro­ce­dures, trans­par­ent re­port­ing etc.) in a bor­row­ing com­pany as a con­di­tion to grant­ing it a sub­stan­tial loan,” said Igo­nin.

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