18:36 14.02.2018

Makar Paseniuk: “People call me ‘Poroshenko’s investment banker’ because they stand to gain from that kind of name calling

20 min read
Makar Paseniuk: “People call me ‘Poroshenko’s investment banker’ because they stand to gain from that kind of name calling

Exclusive interview with Makar Paseniuk, managing partner of ICU Investment Group, for ‘Interfax-Ukraine’ News Agency (Part I)

- Let’s start with the most broadly discussed topic – asset trading unveiled by ‘Al Jazeera’ with ICU involved in the government bonds purchase.

- Have you read the document published by Al Jazeera carefully?

- Yes, we have read it.

- You see, all it did was shout ‘treason’. However, we have carefully read over 90 pages of text and discovered many interesting things.

- Haven’t you seen the text before?

- Of course we have not. We are not party to the law suit – we are neither a defendant, nor a witness.

- Let’s proceed to the charge itself. According to your press-release that followed the Al Jazeera publication of the classified Kramatorsk Court’s sentence, ‘ICU had carried out a mandatory identification procedure and performed financial monitoring in respect of domestic government bonds buyers before entering into the agreement on broker services provision’. Having performed this procedure, whom did you think than you were servicing?

- Having completed the verification, we identified the clients and the controllers. Neither of them were on any sanction lists, and they were not connected with the government acting at that time. As a broker, we carried out the identification procedure in keeping with the law, only then did we carry out the standard broker operations.

We did not have the legal grounds, or powers of the law enforcement authorities to make further investigations in order to study the clients more thoroughly. Subsequently we handed all documents related to these companies over to the investigative authorities.

- Was it Oshchadbank’s (Ukraine’s State Savings Bank) decision to choose you?

- Again, you have to look at what actually happened. As you can read in the published document, the companies had been executing transactions on domestic government bonds purchases directly with Oshchadbank since 2012. The bank was licensed as a broker/dealer and there was no need to involve an external broker. In October 2013, the law changed thereby requiring both parties in a transaction to a third party broker/dealer.

As we understand it, Oshchadbank recommended its foreign clients several brokers. It was not surprising that they contacted us: we were the market leader for government debt instruments. We were also among the first ones ready to follow requirements of the new legislation and as a result, we had been servicing transactions related to domestic government bonds sale and purchase between Oshchadbank and non-residents for two months – November-December 2013.

- How much did your company charge for servicing such transactions?

- ICU charged a standard flat fee for an agent’s role – UAH 1 000 per transaction regardless of the transaction’s volume. We signed a standard contract for broker services provision given that at the very beginning nobody said anything about the transactions’ volume, nor about the execution period for the transactions. Transactions were executed on the grounds of one-time orders. We performed the function of an agent only, Oshchadbank and the companies negotiated the price for securities directly between them. The companies also had cash accounts as well as securities accounts opened with Oshchadbank.

- How many transactions were there in all?

- There were 36 transactions, for which we charged UAH 36 000 accordingly. There was no added value and no credit risk. This is a mechanic process. We execute dozens of these transactions daily and we have around two hundred clients for whom we act as a broker.

- Yuriy Lutsenko, Prosecutor General, stated that the Regulator’s – National Securities and Stock Market Commission’s (NSSMC’s) – inspection was followed by the additional examination of the transactions. Who is carrying out such examination and what is its role?

- That is a question for the Prosecutor General. We learned about the additional examination from his statement to the press.

Previously, following a court ruling initiated by the public prosecutor’s office, the NSSMC inspected our actions in respect of the transactions to find out whether they met the legislative requirements at that time. The inspection lasted for two months and proved that we had done everything correctly.

Either way, we are not concerned about any new potential inspection as we have acted in accordance with law.

- To what extent have requirements for the financial monitoring and client identification changed over the last four years? Would you execute similar transactions today?

- The law that tightened KYC regulations came into force in 2015. According to the law now, financial institutions shall check the source of clients’ funds. The law also stipulates the extended broker’s powers to get information about the client from additional sources.

- If we understand the situation correctly, Latvia carried out asset forfeiture earlier than Ukraine. Nonetheless, international law enforcement authorities have not contacted you on this matter, have they?

- No, they have not.

Let me also mention that in keeping with the European Anti-Money Laundering legislation that is binding for all EU regulated financial institutions, the recipient’s bank may not check the source of received funds that have been transferred by another European bank. It is the remitting bank that is responsible for the primary monitoring.

- According to the declassified court’s decision, was the Latvian PrivatBank a remitting bank? Everything was done there via it?

- According to the text of the court’s decision – yes, almost everything. If you have a look at the International Bank Account Numbers (IBAN codes), you can see three other banks are also involved; they, however, transferred minimal amounts. Those banks are the Latvian Baltic International Bank, the Estonian Versobank, and the local branch of Danske Bank.

- We are interested, if one can apply to the international court on the grounds of that published decision to get payment from Ukraine. We mean those, who have repurchased these offshores, and would classify themselves as good faith purchasers.

- It is hard for me to comment. It would be better to ask international lawyers that question. Broadly speaking, the answer will depend on the jurisdiction in which the case might be handled, the date of execution for the transactions, and other information available at the time of such transaction’s execution etc.

- However, influence of the Cypriot court and the Kramatorsk court is probably different.

- I don’t think it is right to compare them since the subject matter of the potential lawsuits is completely different.

- As an investment banker, in a similar situation would you buy such debt instruments issued by the other country if they were really cheap?

- It is a very old business area: handling distressed assets. One can purchase anything – claims against Pakistan, Argentina’s default debt…

- Can it serve as one of the possible underlying reasons for ‘Al Jazeera’s’ coming up with the classified decision?

- Theoretically speaking. It’s a notion that cannot be ignored.

- Let me ask a more extended question: Do you have a kind of a ‘stop-list’ or ‘blacklist’: a list of clients, which you will not service even if they will go through the KYC procedure, the financial monitoring, and the identification successfully? Or in the Ukrainian investment business is nobody choosy about clients?

- Firstly, there is a wide range of legislative ‘stop-lists’ – these include Ukrainian sanction lists, OFAC sanction lists, EU and UN Security Council sanction lists, and others. Moreover, yes, we are selective when it comes to our clients, and we choose them very carefully. If, for example, we come across politicians, the so-called ‘PEPs’, we will try to avoid them.

- So, it seems that you have come to certain conclusions for the last years, haven’t you?

- We did not service ‘PEPs’ particularly before that. But if you are talking about the country’s major ‘PEP’, we had started working with him long before he became ‘PEP No.1’ – since 2000, when I was working for ING Bank.  

- People call you Poroshenko’s investment banker…

- People call me ‘Poroshenko’s investment banker’ because they stand to gain from that kind of name calling. You could also call me an investment banker of Verevskyi [Andrei Verevskyi is a Chairman of the Board of Directors and co-owner of Kernel], Kozhemiako [Vsevolod Kozhemiako is a General Director and co-owner of ‘Agrotrade’ group], Kostelman [Vladimir Kostelman is a co-owner of Fozzy Group], Petrov [Aleksandr Petrov is a Chairman of the Board and co-owner of IMC agroholding], and many other people. The reason for this is that in respect of certain sectors and areas of business in Ukraine, the proportion of the overall volume of transactions which I have executed throughout my career exceeds 50%.

- Do you provide any services to the President today?

- No. A single contract, which ICU fulfilled for the President, was a joint project with Rothschild on the sale of Roshen. The project ended for us in April 2016 after the assets had been transferred to a ‘blind trust’.

- Another series of accusations is connected with a ‘Rotterdam+’ formula and a purchase of DTEK bonds by ICU. There was pressure on the energy company and the price for its eurobonds was decreasing; later on the State Regulator’s (NUERC’s) dramatically altered its position and the ‘Rotterdam+’ formula was approved. The price for the company’s eurobonds began to increase. The Regulator’s manager, as we know, had previously worked for ICU.

- If you are working within Ukraine’s and CIS’s debt markets, you cannot avoid working with eurobonds issued by DTEK, ‘Metinvest’, and FUIB. If you take a list of all corporate [excluding government and quasi-government] eurobonds issued in Ukraine at that time, the DTEK will account for around 40%.

We began investing in DTEK eurobonds in 2011-2013 at the price that equaled its nominal value. In 2015 and 2016, we purchased some more DTEK eurobonds for two reasons that were obvious for investors: they were cheap securities and it was the start of the company’s negotiations with its creditors on the restructuring of its debt.

On the price, just look at the dynamics of prices for securities of the biggest Ukrainian issuers (shows the table) and a return on investment indicator since March 2015. We can see that the prices had been increasing for all securities. This means that the growth drivers were also identical for all of them.

- You are trying to put forward your investment logic, but I relate more tothe logic of accusations against you: there was a pressure on DTEK, and the price for its securities was decreasing…

- Ok, I understand your thinking. Can you then tell me the reason for the price increase of Ukrainian eurobonds at the end of 2015 and for the almost simultaneous decrease in price for the DTEK and ‘Metinvest’ eurobonds? (demonstrates the chart). Was there a pressure on ‘Metinvest’ as well?

- I think this is the period when the default of ‘DTEK’ and ‘Metinvest’ had just begun, and the government had already accomplished the restructuring.

- That’s correct. What happens when a company goes through a restructuring? It is immediately downgraded to ‘SD’ or a selective default rating. Many investments funds have certain limitations in their memorandums and simply cannot invest in bonds with an SD rating and thus have to sell the bonds. There are, however, investment funds that can invest in almost everything, but even they must still act in the best interests of their clients. Thus, if fund managers refuse to sell SD-rated assets, they take other steps to protect funds of their clients, for example, by entering into the restructuring process with the borrowers.  Many restructuring stories, including the ‘Mriya’ case, show that this route is often long-lasting and unpleasant.

Naturally, major shake-up of investor base led to sell-off and sharp price decrease. Therefore, the main trigger of the price decline is the expected or declared failure to service the debt on the agreed terms; this is the moment when distressed situations take shape. This is a standard trading strategy for funds specialising in distressed assets: analyze the defaulted borrower and the market environment, and come up with possible restructuring scenarios and calculate potential return on investments. We have applied a similar strategy to a number of restructuring processes taking place in Ukraine and other markets .

Also, let’s discuss the actual terms of DTEK’s and ‘Metinvest’s’ restructuring. If, according to the restructuring terms, these companies were allowed not pay interest to their creditors the interest, then, perhaps such restructuring is first and foremost profitable for DTEK and ‘Metinvest’? Where is a so-called ‘treason’ here if creditors have agree to such terms at the expense of their returns on investments as well as the cash flow?

- The point is that you, having a title of ‘Poroshenko’s investment banker’ and connections with the Regulator’s officials that previously had ties to ICU, knew that the company’s financial standing would improve.

- Didn’t the rest of the market know that too?

- They were not certain to the same extent.

- If you are talking about the Regulator’s decisions, all of them were transparent. If you compare the dates when these regulatory decisions were published or taken with the DTEK eurobonds prices chart at that time, you will hardly see any correlation (demonstrates another chart).

It is a well-known fact the ‘Rotterdam+’ formula does not directly influence the electricity prices for households. Let me also remind you that Regulator’s decision to increase the electricity price for households was prompted by the IMF and the Coalition Agreement.

Furthermore, we have a wholesale model of the electricity market in Ukraine. In such model power companies are paid by the energy market after it accumulates funds from the consumers. The market operator distributes the funds among power producers proportionally to their output and tariffs. Bearing that in mind, the “treason” accusations would be true if the distribution of the pool of funds received by the energy market was skewed towards DTEK and other thermal power producers to the disadvantage of other producers.  In reality however, it happened differently. For instance, the tariff for ‘Ukrhidroenergo’ grew for more percentage points than that for thermal generation, which provided for a five-fold increase of the company’s investment program.

- If there isn’t any ‘treason’, why is there so much noise around this topic then?

- I think that all the clamor  around ‘Rotterdam+’ is primarily a result of the oligarchs’ quarrels caused by rather simple reasons: someone has begun to earn less, whereas others allegedly more. The major industrial electricity consumers are well known moreover, share of electricity in total production cost for them constitutes as much as 30-45%. To make the topic big and flashy someonedecided to add some political tint. Only this explains why everyone does not focus on the wholesale-retail electricity price (WRP) in general, but on ‘Rotterdam+’ and coal generation, which constitutes only 30% of WRPwith the share of output decreased from 40% in 2015 to 25% in 2017. If we are talking about the ultimate electricity cost, it is the WRP that the industry should care about. . Hovewer, instead of instigating substantive discussion, mass media opts to publicize series of accusations and opinions of ‘experts’

There is yet another fact to consider. Let me ask you this: Who has been the main proponent of the schedule of the electricity, gas, and heating prices increase for households?

- The IMF.

- Exactly. By 2015, the fees for electricity, gas, and heating for households covered the lesser part of production costs. This caused inefficiency and imbalances within the sector: households were subsidized at the expense of the industry, there was fiscal pressure on the budget, and consumers were not encouraged to adopt energy saving measures. Elimination of  these imbalances was important for sustainable economic growth, and to no surprise formed part of the IMF requirements as well as in the Coalition Agreement.

Was the discussion with IMF about tariffs increase public? Was the timing of their increase transparent?

- Yes, it was transparent. For various generation types, however, such an increase could have had a different impact. It also depends on the Regulator.

- Price increase for households results bring more cash flow into the energy market, which (as we already know) is distributed amongst all energy market participants. If one knows the schedule of tariffs increases, one can calculate the approximate additional cash flow that each type of generation can potentially receive. To illustrate the point – during 2015-2017 the amount of additional cash flowed into the energy market from the increased households’ tatiffs constituted around USD 1,6 bln. The amount was distributed among all generation types proportionally to their share.

The share of the thermal generation in the WRP amounts to 35%, of which DTEK has around 70% share. Consequently, in 2015-2017 the company could have get additional cash flow of ca. USD 390 mln provided the company’s expenditures remained the same. At the moment of restructuring the company’s debt was USD 2 bln. Assuming interest rate was 10%, then the absolute cost of such debt per year totaled to USD 200 mln annually. Now let us compare the annual cost of the DTEK debt servicing with the additional funds in the amount of USD 390 mln, which the company could get in 2015-2017 as a result of tariffs increase. The debt could be serviced. it also worth mentioning that company’s EBITDA was positive at the time of restructuring. This is the investment idea in a nutshell: the company would be able to restructure its debt and service it in full despite the conflict in eastern Ukraine and ailing economy.

- How many clients have you serviced by purchasing DTEK and ‘Metinvest’ securities for them?

- We do not provide any services to clients in respect of these securities and we do not provide broker services in respect of eurobonds at all. We buy individual assets only for ourselves and for the funds which we manage.

- What is your share in DTEK and ‘Metinvest’ issues?

- The overall volume of DTEK issue totals USD 1,3 bln, and ‘Metinvest’ is USD 1,2 bln. Our share in these issues is insignificant. In this respect, we cannot compete with the global funds that are major holders of these securities.

- Moreover, you might also have a share in the FUIB securities issue, and this is a one-owner risk.

- We have a different opinion about it; it is the fundamental analysis that we consider in the first place.

- Does it mean that you do not consider the political risk at all – today ‘Akhmetov is well-liked, tomorrow he is not that well-liked’?

- We have experience working in many different environments. The asset’s quality and its trajectory is what we are really interested in.  Financial results of most Ukrainian issuers depend on international commodity prices: for instance, when the price of metal or iron ore grows then the shareholder earns more, when they decrease the shareholder earns nothing, and when prices fall – the company can barely service its debts in a timely manner. The situation is then clear for the creditors, and they are ready to face those risks. The creditors, however, do not understand the situation when the companyy simply does not want to pay its debt. And there will be nothing worthwhile investing in in this country until this simple rule is well understood. The creditors do not care who a shareholder is: they were ready to go to court on ‘Mriya’ issues, they will be ready for the long-lasting legal proceedings in cases of DTEK, ‘Metinvest’, and FUIB.

- To summarize this ‘accusatory’ part of the interview, what is or who is the reason for yet another barrage of accusations against the company?

-  We link it with the tightened political struggle as well as with the reforms that have been carried out by our former employees and managing partner. Even though these individuals are not connected to ICU anymore, some people are aggrieved by their reforms because they can no longer reap the proceeds of corruption. These ‘sufferers’ find it easier to attack ICU. We are the collateral damage caused by politics and reforms.

- Following such logic - the nearer we get to 2019, the more pressure you will feel.

- Yes, we expect this.

- Does the extra attention on the company not frighten off your clients?

- Thanks God, no. They understand this happens and know what is happening in the country.

- We were surprised to find out that ex-MP Eduard Prutnyk had sold part of his business here and purchased a diamond mining company in Africa. Do you plan to do something similar?

- No. Our business will stay in Ukraine. We are comfortable here. Besides, we can invest in any foreign assets from here. Today I can buy the Ukrainian securities, tomorrow I can buy the Croatian Agrokor bonds, the day after tomorrow – Suriname bonds etc. (By the way, we have already purchased Suriname bonds. We learned a lot when we were working on our investment thesis and it was a successful investment). And today, with all its potential, Ukraine is certainly one of the best countries to invest in.

- Today KPMG has just sent a report stating that Ukraine is a good country for starting a contract business.

We appreciate our employees and pay them competitive salaries which are no different to salaries employees in the developed countries would get for the same job – if we compare them on disposable income grounds (and this is the right way to think about it). With the same disposable income, the quality of life here and there is not significantly different.

Our key personnel are in Kyiv. Most of our employees trained in international banks and asset management companies, many have worked abroad, and many has an international education. There are also many foreign job seekers who apply to work with us, and there are quite a few foreigners already working for the company. These are people that have graduated from the popular ‘Princetons’ and ‘Stanfords’, and have worked for ‘Citibanks’ and ‘Deutsche banks’. In general, our team in Ukraine does not differ at all from the teams working for the western investment banks operating in the region.

- Did you change the group’s business structure in Ukraine?

- The business structure is the same. If we talk about the Ukrainian part, it consists of several divisions. There is the asset management business. The major part focusing on pension funds management.

We also have a securities broker/dealer as well as an ‘Avangard’ bank – despite all ‘accusations’, it is a small bank with a transparent business model and reporting mechanisms. Anyone can see how much Avangard earns and can calculate (and this is the most important thing) its returns on investments.

- You have not disclosed the group’s financial indicators before, but the press mentioned the information about the annual net profit in the amount of USD 150 mln.

- This is certainly a very flattering estimation, but it is not correct. Unfortunately, the group’s annual profit is much lower. Being a private company, we do not publish it. We, however, disclose this information to our foreign counterparties upon their request.

- How much assets are there under ICU management?

- Today we manage assets which total volume exceeds USD 500 mln.

To be continued