14:45 21.09.2021

Ukrzaliznytsia misleads the public and manipulates the facts: VR Capital's comment on UZ statement concerning its debt to a foreign investor

6 min read

NEW YORK, September 21, 2021: On 17 September 2021, Ukrzaliznytsia ("UZ") issued a press release expressing certain views regarding its debts to VR Global Partners, LP. ("VRGP"). This press release contained a number of misleading and wholly inaccurate statements. VR believes that discourse on this topic of growing public interest, both inside and outside Ukraine, should be factual and accurate. Accordingly, VRGP seeks here to identify the inaccuracies and falsehoods in UZ’s press statement to assist the public in understanding the realities of the current dispute.

UZ states that it was wholly unaware of the intention of the original lender, Prominvestbank ("PIB"), to sell its loan portfolio. As an initial matter, there was no requirement for PIB to inform UZ of its plans — UZ was the borrower and the loan provided full legal right of the lender to transfer its position without borrower consent. Further, UZ could hardly have been surprised by PIB’s decision. UZ had been in principal default on the loans for over four years at the time of the sale, and PIB had resorted to issuing court proceedings in an attempt to collect the loans. UZ’s failure to consensually restructure the loans also led, in 2016, to a covenant default on its Eurobonds which was cured in large measure by the cooperation of VRGP which was UZ’s largest bondholder at the time.

Beyond simply being irrelevant, however, UZ’s claim that it was not aware of PIB’s intent to sell the loans is verifiably false. On February 13, 2019, eight days prior to the auction in which the loans were sold, UZ’s senior management, including its then-CEO, Yevhen Kravtsov, and its just-replaced CEO, Ivan Yuryk, met at UZ’s offices in Kyiv to discuss the issue of the loans and the upcoming auction with senior management of VRGP. At that meeting, UZ management expressed no objection to the auction or to VRGP participating in the auction. Indeed, VRGP explicitly requested the meeting in order to ascertain that UZ management were aware of the auction and that the company did not dispute the validity of the underlying loans.

Further, the characterization by UZ of the sale of its debt as "behind-the-scenes" does not comport with reality. The debt was sold in a public auction whose procedures were approved by the NBU. The auction price was supported by two independent valuations provided to PIB, including one by the global accounting firm, KPMG. Far from being "behind-the-scenes", the auction was open and transparent and followed best international practices.

UZ goes on to claim that VRGP’s purchase of the loans occurred outside of Ukraine and did not constitute an investment into the Ukrainian economy. This, too, does not stand up to scrutiny. The transaction took place under a Ukrainian law contract, and proceeds from the sale went directly into the accounts of PIB, a Ukrainian-registered bank. In subsequent months, the bank repaid similar amounts to its Ukrainian depositors, the vast majority of which were physical persons. With all of the proceeds of VRGP’s purchase ending up in the pockets of Ukrainian depositors, it is hard to imagine a more explicit case of a foreign investment in Ukraine. 

Finally, UZ allege that VRGP is seeking "more than $388.5 million" from the company. Such a figure is completely a figment of the imagination of UZ’s press department. As UZ well know, on February 28, 2019, VRGP presented a formal offer to UZ for the settlement of the debt by way of conversion to Eurobonds in an amount of $145.9 million. This implied a write-off of all overdue interest amounts as well as a discount to the principal amount of loans. In total, VRGP’s proposal amounted to permanent savings for the Ukrainian state of over $110 million versus the total claims under the loans. VRGP never received a substantive response to this proposal. Likewise, VRGP has made multiple further proposals to the company in the ensuing two years. None of these proposals have sought figures even remotely in the realm of what the company, without any basis, attempts to have the public believe.

On June 15, 2021, Richard Deitz, President of VR Capital Group Ltd., testified before the Temporary Investigative Commission of Ukraine’s Rada, chaired by Deputy Yulia Hryshina, which was investigating issues of corruption and ineffectiveness at UZ. VR Capital placed into public evidence before the committee an entire archive of its correspondence with UZ regarding the ex-PIB loans, including all proposals made to the company and any responses received from UZ along with detailed testimony. A copy of VR Capital’s testimony can be found here.

VR Capital believes in full transparency and has at all times been ready to put all of its dealings in the public realm so that both its actions and the actions (and inactions) of UZ’s management and supervisory board can be accurately assessed. To date, UZ has not been willing to similarly be transparent about its actions and motivations which have allowed its debt to grow unnecessarily and its reputation as a borrower to be damaged, with concomitant harm to its shareholder, the Ukrainian state.

UZ’ concludes its press release by stating that the company is "absolutely ready to fulfill all obligations to its creditors". This is self-evidently false. Were that the case, UZ would have never defaulted on this debt and would have consensually restructured with its original creditor. It is only as a result of UZ’s lack of readiness to fulfill its obligations that the original lender took legal action against UZ and ultimately placed the defaulted loan portfolio on auction.

VR Global Partners, L.P. ("VRGP"), is an investment fund managed by VR Advisory Services Ltd ("VRASL"). VRASL is registered as an investment adviser with the U.S. Securities and Exchange Commission and VR Advisory Services (UK) LLP, a sub-investment adviser for VRGP and certain other funds, is authorized by the UK Financial Conduct Authority.VRGP launched in May 1999 and has been the recipient of over 15 industry awards in New York and London for its performance over the years, including, most recently, EuroHedge’s 2020 award for Long Term Performance (20 Years) among global macro, fixed income and relative value funds. 

VR Capital is an international asset management firm serving an institutional investor client base with approximately $5 billion in investor assets under management. VR Capital is one of the largest and most experienced western investors in Ukraine with a track record of investing in the country dating back to 1999. The firm operates via its principal offices in New York and London and serves a client base of leading western institutional investors.

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