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14 April 2016



Exclusive interview of Makar Paseniuk, Managing Director of ICU Group, with Interfax-Ukraine Agency (second part, read the first one here)


- How does ICU make a profit nowadays given the not-very-optimistic conditions we discussed during the first part of our interview?


We have several lines of business. Apart from the restructuring projects—like the debt restructurings of private companies called Kreatyv (creativity) and Mriya (dream), on the advisory side of our business—we do a lot of consulting work for conglomerates in Ukraine. Clients pay us for our expertise and assistance with things like determining investment effectiveness, making acquisitions and debt restructuring.


- If you can’t name the clients tell us at least what sectors they are in.


As I mentioned, these are conglomerates, or multi-corporate enterprises. They’re in agriculture, retail, and FMCG. There are enough of these kinds of businesses in the country to keep us busy. They do not pay much, but it is steady. Our association lasts for years. I have one client I’ve been working with since 2005.



- Didn’t these clients get into the vicious cycle of heavy debt loads?    


Well, why are the names of Mriya and Kreatyv on everyone’s lips? That’s because they exploded financially. And it will happen to more of them. Our regular clients adhere to their restructuring agreements and that’s why there aren’t problems between these clients and their creditors.


Many different kinds of companies look to us for restructuring advice, from EBRD to small corporations.


- Taking into account your experience in corporate restructurings and the recent Ukrainian debt restructuring, how much of a haircut do investors have to take? 


Not all debts are forgiven nor do all investors and lenders take a haircut. Even when sovereign external debt was restructured in 2015, which involved a principal reduction, creditors received VRIs (value recovery instruments), which are Ukraine government securities with payments that are linked to GDP performance. Also, creditors have a claim ahead of stockholders. Every restructuring deal involves a compromise. The purpose of every restructuring is to give the business the opportunity to survive and generate cash flow. If it is not possible, or the stockholders won’t agree to a compromise, then a secured creditor has the option to call its loan. The answer to the question about what’s going on, it is then determined by the economy and the analysis of theoretical options. Based on experience, hair-cuts or sales of loans with discounts only occurs in situations where someone offers cash. But the concept of having a 50% hair-cut of the principal and the remaining debt to be paid within 10 years with a 3% coupon (an ideal debt restructuring from the point of view of debtor, which is a fantasy) is not going to happen.


That is why our second business is analyzing credit portfolios. What should be done in my opinion? First of all, the Deposit Insurance Fund should quickly and transparently sell its toxic assets. They must create a market for these assets and invite bids to begin the process of price discovery. This would raise  the money needed for their budget. Second, state banks should be allowed to write off and sell their toxic assets also, which would facilitate the economy’s restart.


- Both the Prime Minister and your colleagues in the investment business have doubts that Deposit Insurance Fund will succeed in organizing open and effective sales.


Indeed, there have been no viable suggestions to accomplish this so far. But we continue to hope. Recently, the Fund announced a new procedure of providing equal access to information about the assets for sale to all potential investors. We’ll see.


We are not interested in retail portfolios, that is portfolios that hold retail accounts. For this business to be profitable, it requires an infrastructure, which we do not have.


We are interested in large corporate loans that are under water. You buy the debt and at the same time negotiate with the borrower on restructuring, conversion and/or additional investment into his business. The requirement is that the business must be vibrant. This is really a private equity business with the entry point being through debt.


- Are you interested in attracting partners for these projects?


We are interested in attracting investors. This is something we are actively working on, and we’re creating a fund for this. After all, we are asset managers and work on commission.


- Maybe first you should show some successful examples as a way to attract investors?


That’s exactly what we are working on. We have long-term clients who are eager to invest in a pilot project, which is what I would want if I were a client.  


Right now, to establish a track record, we are actually trying to close a few projects by ourselves, or depending on the type of deal, with co-investors. When everyone sees that it’s really working, we will look for additional financing from clients.


We are also working with commercial banks that started behaving more rationally in terms of risks and valuing their assets. We’ve looked at their credits and at some real estate assets.


What sets us apart from other investment groups, even larger ones? We can do most types of deals, if not all of them. The mandate of our funds, as well as owned capital, allows us to work with private equity and both liquid and non-liquid instruments. Since we look at investments from different perspectives, we have a broader worldview concerning the cost of things. Roughly speaking, if the yield to maturity of Eurobonds of state banks like UkrExImBank or Oshchadbank is 15%, then I’m not interested in non-liquid assets with the yield less than 18%, nor are other investors. Something else is that this is very time consuming and most people don’t bother. Advisory (consulting business) is interesting, but it is not a big money maker.


At the same time, we are actively developing our own asset management fund that will invest both locally and internationally.


- Which international markets?     


Last year, we launched the Global Opportunity Fund (GOF), which is similar to the strategy of our CIS Opportunities Fund. It invests in the CIS-originated securities traded in the international financial markets but it [GOF] has a global strategy. We ran it for six months as a test and then opened it to subscription. In the second six months, the fund yielded 7%, which, taking the global situation in account, wasn’t bad.


- How much money did you attract to this fund?  


Currently, we have about US$30 million under management, but the fund just opened.


- And what about domestic funds?


We manage the largest bond fund in Ukraine. Last year its yield amounted to 56.9% per annum. This is the highest rate among all public funds in Ukraine. Since we launched the fund in September 2011, its yield amounted to 403% per annum.


The second pool of assets we manage is pension funds. We consolidate these assets because the asset management business is a scale business. If you are going to be in this business, you look for economies of scale for fixed expenses, including management fees and commissions. When we were launching our pension fund Dynastia (Dynasty), we wanted to test this model before assuming responsibility for third parties. Then we bought an asset management company Troyka Dialogue Ukraine. It had zero income and even a small loss, but combined with our existing business, it is quite interesting. Recently we became affiliated with another small non-governmental pension fund. So, there is some consolidating going on now. It is not a large market or particularly profitable, but little by little, some money is being made.


- Have you been successful in attracting new money to this market?


In all our funds there is a net inflow of funds, but most of the growth is due to M&A.


- Many companies were building their strategies assuming pension reform in Ukraine. But now it is clear: that won’t happen for at least 5-10 years. Is it a plus or a minus for you? Maybe now workers understand more clearly that there will be no state savings and, therefore, one should invest in non-governmental pension funds?


Taking into consideration the decline in incomes, these arguments are not germane. When incomes decline, savings decrease. Given the current economic conditions, those considerations (mentioned in the question above) are not rational ones for an ordinary citizens (to start putting aside some of their earnings and invest them in non-government pension funds).


- Taking your company as the example, we would like to discuss another, as they say, case study. Your colleagues and co-owners of the company left for senior public positions. Valeriya Gontarieva now heads the National Bank, and Volodymyr Demchyshyn became the Minister of the Energy and Coal Industry. Whatever people say about their achievements or mistakes, the overall opinion on the work of the country’s present authorities is quite negative. How does this affect ICU’s business? Does the presence of your former colleagues in senior governmental positions help or cause problems? If it’s the latter, how do you solve such problems? For example, are you becoming more open or careful when choosing clients?


You ask questions and give correct answers, so I don’t need any prompting. Indeed, we are doing that. There are a few frequently asked questions.


The first are about Valeriya Gontarieva. No one seems to believe that she really left ICU. They think what she revealed in the declaration is fiction. But it’s not fiction. We did buy out her portfolio. If we had paid her the total amount in a lump sum, people would have believed her association with ICU was over. But, unfortunately, the amount we could have paid in one go did not satisfy Valeriya.  There is nothing wrong with this, but it created a situation where she hasn’t been a partner for some time, but we haven’t fully settled with her.


We maintain normal relations with her, but we communicate very rarely. We are not engaged in “fixing” stuff in the banking sector, as many like to accuse us. Yes, we do have the bank Avangard. Its mandate is clear and transparent—it’s a specialized treasury bank. Avangard has almost no external clients, it does not accept deposits from private individuals, it does not provide commercial credits, it is not involved in money laundering, it does not have an open cash centre (according to regulations, we have a cash desk, but it is not active and even the salaries of our workers are transferred to cards at another bank because the cash desk is not working and we do not issue cards), and it also doesn’t have exchange offices.


We could try to expand into merchant banking, but for this we would need funding. In our bank model, there is no steady funding except for the capital, which is a nominal amount. There is no mechanism to attract the passive part in  required volumes and for the required term structure (with different maturity profiles). In addition, doing this on the banks’ balance sheet is exceptionally difficult and carries risks with the banking regulator, management, etc. That’s why it is still better to do merchant banking from the platform of investment funds. The risks are the same, but there is more flexibility, and it is easier to attract leverage.


- In respect to Valeriya Gontarieva, there are many accusations against you concerning operations with public bonds (domestic government bonds). They say you are pulling money out of the National Bank either directly or through a transit, or extracting money from the banks under its wing. Or even without this mechanism, then for kickbacks or money laundering, or tax avoidance.


To the best of my knowledge, NBU was selling sovereign bonds issued domestically from its own portfolio from the summer till December 2015. ICU took part in the auction of the sale of these bonds according to standard terms. We did the same when buying certificates of deposit for Avangard bank. The auction sale took place openly on two stock exchanges—Perspektyva and PFTS—with absolutely equal access for all the members through a competitive application process from all the buyers. All the information on these NBU operations is public, and anyone who’s interested can access it on the website of the regulator. This is the answer to “pulling money out from the National Bank either directly or through a transit, or extracting money from the banks under its wing.”


Now we proceed to the manipulations of coupons and others of their ilk. Every day, every bank calculates and charges the accrued coupon on its records—it’s impossible to ignore it or “lose” it. Consequently, it’s not possible to manipulate the accrued coupon—it is always calculated, and it is added into the price of every bond. Other than the accrued coupon, the price is also calculated from the nominal amount of the bond and the discount/premium to the nominal.


Within the framework of repurchase agreement operations, there are really “buy and sell” operations at prices that differ from market prices, with a hair-cut. But the repo deals consist of two operations. First, the owner of the bond sells his security and then buys it back at an agreed-upon, higher price. That is actually all there is to it. There’s no magic, no obfuscation, no “wings”, just credit risk. The stuff that is misconstrued by the mass media is about deals taken out of context and an unwillingness to devote 30 minutes to learning how these securities work.


And I will mention the sales of DGLB by banks before coupons’ payout, as we and banks were actually accused of these awful “misdeeds.” A few years ago, tax accounting rules used by banks to record operations with government bonds on their books had discrepancies based on their judgement on whether to record the accrued coupon as trade income or to record it as an interest income. That is why some banks were selling portfolio bonds before the payment of coupons, so they could record this return (accrued but not actually paid out by the issuer) as trade income. After the new Tax Code was adopted, the methods of recording accrued coupon were brought into accordance with world standards, so this changed the economics of some investors’ decisions on when to sell bonds and how to account for the income. Generally speaking, it is not that important what banks were doing, why or how. What is important is that AKI is always “hiding” in the selling price of the bond, as I said before.


- But according to these explanations many others were/are engaged with similar operations in the market. Then why it is mostly you in the headlines?


Why is there so much attention on ICU? Because we are managing the largest bond fund in the country. We manage the assets of nearly one billion hryvnias. This is a substantial sum in the Ukrainian market. We have our own working capital, and the ability to attract some leverage (we are not feeding it, but when conditions are right, it could reach two or three times). Also, we are actively managing the fund and our capital. Thus, before criticizing us about the size of our share of the market, they should have asked what’s going on with the balance sheet of our bank, what are the assets in our fund, and what’s our strategy. Besides, unlike all the rest, we are active traders. When someone in the market needs a quick operation for 100mln UAH, you can imagine the procedure of decision-making at any bank? But with us, this procedure is very quick. That’s why our volumes are so large.


In addition, my partner has been trading with foreign clients buying Ukraine bonds since his days at BNP Paribas and ING, and he has a huge customer base.


I would like to say that I don’t understand the insinuations on this topic. In particular, I don’t understand them because rumours like “the National bank is buying something from someone” are easy to check. Moreover, lately it has been only selling government bonds to the markets (mainly banks) as banks do not see opportunities to lend to businesses. And that’s the problem. The sooner the market is cleaned up, the sooner capital for buying will return to our markets. I’ve already mentioned this above, that the first-order problems are the current base conditions of the economy and the future pace of economic growth. When I saw that our economist wrote “the Ukrainian economy increased by 1.5% and the trend is reversed” I asked “What is it about?”


- Don’t you agree?


No, I don’t. This is statistical error. On this basis, it’s not telling anything. But let’s turn back to our, as you said, case study. The second problem is Volodymyr Demchyshyn and VinnytsiaOblEnergo.


Demchyshyn was a partner in ICU from the very beginning. Mathematically, after buying out his shares, his share increased to 9.9 %, since the buyout was conducted by the company, reducing its capital, which hadn’t been distributed for a long time. The partners receive wages and bonuses, and money, or capital, continues to work. So far, all the partners have been satisfied with this model.


- Why hasn’t he sold his share?


I can understand his point of view. If you sell, basically it’s forever, and being Minister of Energy is temporary.


- But then you need to show “Chinese walls” and convince the public that there is no influence and no conflict.


Maybe you didn’t notice, but we have “Chinese walls.” What these pseudo-investigators don’t understand is the simple fact that to conduct our business, we are subjected to a vigorous analysis by all our international contractors, which is beyond their imagination. In the piles of documents that we give, there are copies of contracts with Valeriya Gontarieva and Demchyshyn as they are considered to be PEPs—politically exposed persons. All of this is provided to serious organizations along with audited reports.


By the way, Konstyantyn Stetsenko and I had a conversation about buying out his portfolio, but at the time he didn’t want to, and I cannot force him. In our shareholders’ agreement, this situation was not foreseen. As to the fulfillment of some formal procedures by him, we have a management agreement for his shares, which was signed by him before entering state service, with copies given to the appropriate government bodies. It consists of some 30 pages, if I’m right. Everything that we can and cannot do on his behalf is spelled out. These are actually the questions we discussed. And with Valeriya Gontarieva, we were talking about the price of her buyout and the payment schedule. The agreement on the management of Stetsenko’s shares was signed with our asset management company that is licensed in the British Virgin Islands.


Now, when talking about participation anywhere: we are not trading gas, coal or whatever—we are not trading. VinnytsiaOblEnergo is an asset that we bought in the secondary market at a price higher than where it was sold at the auction.


- Was it made on the Hryhoryshyn’s request?


Why Hryhoryshyn’s? No one believed in VinnytsiaOblEnergo. And concerning Hryhoryshyn, I will tell you the following. VinnytsiaOblEnergo announced the dividends, and so for Hryhoryshyn’s portfolio, the dividends were paid out immediately, but for ours—just recently.


- So why are you being silent about it?


Should I have been instantly going to the press? I’ve been chasing VinnytsiaOblEnergo management to press them to pay me the payments due, the dividends, for three or four months, meeting with his management from time to time and asking, “Where are my dividends?” And they told me: the money ran out. Nevertheless, I have representatives on the auditing committee and supervisory board (thank God, cumulative voting was spelled out in the statue). So, they are sitting there and watching what’s going on, but we cannot influence it. The shareholder’s agreement, which I was hoping to sign, is still not ready. That is why we are simply passengers on the ship of Ukrainian justice.


So, this is how we are connected with Hryhoryshyn and Demchyshyn—even fighting for the dividends!


- Thus, to conclude. Did entering state service by Gontarieva and Demchyshyn negatively influence you?


Yes, in terms of PR, it influenced us negatively. What have we gained from it? We were additionally forced to pay out part of our capital.


- You became more famous.


Yes, unfortunately, but it’s “slow but steady wins the race” or “money loves silence.” It is not about us anymore. I lost this last-mentioned guideline, which I’ve been following for many years. Now we have to meet with the journalists. And we are doing this regularly and talking about our business.


- Are you now thoroughly analyzing the clients?


We’ve always paid attention to due diligence in selecting clients, and we treat whomever we work with very “hygienically” from an investment banking point of view. In contrast to other trading operations, most of our clients are long-term relationships, so in most cases, we know them well. That is why before entering into such relationships, it’s important to know who you’re working with. My customer base hasn’t changed at all over the last few years. You can see on our web site that my circle of contacts has remained the same. I haven’t had any new clients since my colleagues left for state service.


- Then the last question will be about the “blind” trust of Petro Poroshenko, and your mandate on the sale of his assets.


First I’ll explain about the “blind” trust, where the assets are transferred. It is managed not by ICU group, but the Rothschild Trust, an international bank licensed to conduct trust activities. The trust was created solely for Roshen.


As to the mandate, it remains, and we are actively negotiating asset sales by installment. I’ve pointed this out many times.  


- Do you have this mandate with Petro Oleksiyovych Poroshenko or is it now with the trust?


The mandates are with Ukrainian fund, Prime Asset Capital, and Roshen.


- Do you have the mandate only on Roshen or on other assets as well?


What other?


- International investment bank, “Leninska kuznia”, for example.


Before all the events, we were representing the interests of Poroshenko for the sale of Leninska kuznia. We even had the sale and purchase contract signed and settlement had begun. But after the macro situation in the country changed, much of the contract was incomplete, and it has been restructured three times so far.


- Although this whole trust’s structure is so complicated it is still not working in the perception of citizens. Because few people will believe that a civil servant, when making a decision on Roshen, will not think that he’s doing this for Poroshenko.


 That is so right! It turns out that to close all these issues one should sell everything and donate the proceeds to state budget. I was talking about this at the very beginning, by the way. I mean, given that he sells all the assets, and won’t donate money to the budget, the next wave of trolling will be “in which bank is he keeping it?”, “is this bank getting re-financing?”, “and if it’s a Swiss bank, as the trust is now, for example, doesn’t he believe in the Ukrainian economy?”. And then after the money from Rothschild, Credit Suisse or UBS comes in, everybody will be saying that this is Poroshenko’s money and he is buying out the entire economy . . . and so on, and so forth.


Basically, turning to the private sector, SCM and the business of the rest of the oligarchs, I’ll make one more, last comment. One should understand the importance of the private sector and major companies, big businesses (in this case it is not about state companies) as what brings capital into the country. Why does SCM have so much debt on its books? Because they were given money and became a corporate proxy for the entire Ukrainian economy. People didn’t have to spend much time thinking about whether or not to give loan to SCM.And if people do not need to think much, it expands the potential base of investors—both banks and buyers of euro bonds. So, if this whole business explodes, then, generally speaking, there will be no one to finance the external investor in Ukraine.


- What is a possible trigger that could make DTEK or MetInvest explode from their debt leverage?


Actually, I’m against that something explodes. Because if it explodes, no one will come here for the next three to five years. One cannot try to grab everything!


I feel sorry for those (investors) who fell for Mriya, Kreatyv and potentially will fall for the next set of bond defaults by Ukrainian companies. I’ve been hearing about them for decades. I feel sorry for those people because they really believed. They say “we made a mistake and are ready to take the consequences.” But we want something to be done here, domestically, because the commercial risk was ours, but the fraud risk wasn’t ours; let this man take the rap. This is what we need to do to resolve these cases. Otherwise, we look like the pile of con-men. Why should investors responsible for this?


That is why the interests of creditors must be protected and the business interests should be heard.


- A question: There is this thing among the recent accusations against you—the contract with the offshore company AS Prima Societas Limited with the American Ben Barnes Group for lobbying services in the amount of US$100,000 a month, which was financed by you allegedly in favor of Poroshenko and Gontarieva.


The answer: I will start by saying that we are private company,  so we can pay those whom we want to pay. I hope no one would object to this. Secondly, in fact, the actual amount of money paid was a total of US$220,572.


Now, who are the lobbyists, what they are really doing and for whom? Lobbyists are like investment bankers who bring interests together, but, as opposed to investment bankers, they do not participate in their clients’ deals or receive retainers (fixed payments/subscription fees). Their clients are private businesses—both American and foreign.


Some time ago, ICU brought to Ukraine such famous people in the financial and investment world as Nouriel Roubini and Nassim Taleb among others. The aim was to raise awareness on Ukraine, its opportunities and problems. When they participated in the discussions with business and political elite at different events they stimulated the thinking process and made people understand that  Ukraine is not the entire world. It just cannot be; we are a small part of the world economy. We should design our policies taking into consideration what is going on in the rest of the world.


What do you think, did Taleb and the others participate in these events for free? After Roubini’s visit, by the way, he frequently mentioned Ukraine in his speeches and analytical surveys. Would it have been possible without our efforts? I think not. We published a series of business books in Ukrainian to increase the level of financial literacy. Do you think the publication rights are free? So, I hope that everything abovementioned answers the question about what lobbyists do and for whom.


The President, the Prime Minister and the Head of the National Bank communicate directly with everyone they are interested in. They do not need lobbyists for that. But for private businesses, this kind of privilege does not present itself just like that, unfortunately.


Just look at how Ukraine is looked at by the outside world—all scandals and negative publicity. Most of our potential clients and investors can invest anywhere in the world. Their attention span is 10 minutes. When they read about Ukraine they ask me, and those like me, one question, “Why should I bother to spend my time? It’s complicated, it stinks, and we’ll think about it after it’s resolved.” The country, the economy, private business and finally, average citizens suffer from it.


One of the reasons for the increase in the stock market—Ukrainian shares and bonds placed in 2005-2007—was that Dragon, Concorde, ING and others invested their own money into the development of the story called “Ukraine”. You wouldn’t sell anything unless you sold Ukraine’s story. There were receptions, conferences, days of Ukrainian companies in London, New York and some cities in Asia where executives of large organizations came. Do you think this all took place for free?


Just watch Euronews. There is a lot of advertisers, like Invest in Azerbaijan, Invest in Georgia, Invest in Turkmenistan, Invest in Ireland, etc. And what about Ukraine? Don’t touch, run—this is the main message. What the Ukrainian elite really needs is a smart, foreign PR agency and a good communications strategy. To my mind, the responsible people in this country should repeat these few phrases every day as a mantra: we are all in the same boat; sink or swim, one should not take tourism for immigration.


Is it too much, US$220,000, to pay for the sake of public relations, to attend a few meetings or make phone calls when needed? It suits us and thank God, I can afford this.