Parex searches for appropriate buyer

RIGA - Parex bank Chief Executive Officer Nils Melngailis says that the sale of the bank, expected to take place this year, “could be one of the biggest and most complicated deals in Baltic history,” reports news agency LETA. He adds that finding a buyer for the banking group is unlikely before the end of March, though it could happen before summer. Melngailis believes as well that it would be preferable that the bank and its real estate fund be taken over by one buyer, or by a group of corporate buyers.
Parex, whose failure in 2008 triggered the Latvian government’s need to turn to an IMF-led group to obtain international lending support through a 7.5 billion euro loan package, “may be sold this year as the recession-stricken government seeks to boost revenue… The government needs to get the money back and if the proposals are adequate, they will be ready to negotiate,” adds Melngailis, reports Bloomberg.

A sale of Parex would free up money for the government, which has poured about 1 billion lats (1.4 billion euros) into the bank in the form of capital increases, deposits and guarantees. Private equity firms, private banks and asset managers and retail banks have expressed interest in the lender; it may be sold to a group of companies, the government has said.

The government may sell the bank in two steps, said Melngailis, who was named CEO in December 2008. This would be in the form of separating ‘non-performing’ or ‘non-core’ assets from the bank, and placing these into a fund. “These distressed assets are more likely to attract financial investors, but for the bank itself, industry investors would be the most likely candidates,” Melngailis said. “Large banks have an easier time in funding, while for a financial investor it would be difficult to buy commercial banks and be competitive with other large industrial banks in the region.”

He said a banking group would also be favorable, as Parex “is vulnerable” and needs to be able to fund itself from the market so the government can avoid having to bail it out again. “It’s important for the bank on who the owner is,” he said. “It needs to be a bank with a large balance sheet that can support its subsidiaries. The size of the [buyer] will be a very important criterion.”
The bank director believes that there could be interest from venture capital companies for the real estate fund, which was established to hold ‘repossessed property.’ Other interested parties could be Scandinavian, German or Austrian banks with the strategy of developing business in the East European or Baltic regions. Such buyers could be interested in the bank’s business with ordinary clients and corporate clients, as well as in its work with wealthy private individuals and asset management. Melngailis notes that a large commercial bank could be interested.

The European Bank for Reconstruction and Development will also have to decide whether it will sell its 25 percent stake in Parex in any deal, or whether they’ll stay on with the new majority owner.
Under terms of the bailout, the Financial and Capital Markets Commission and the government imposed transaction limits on Parex clients, of 35,000 lats a month, to stem the outflow of funds. The restrictions may be lifted if the bank agrees on the restructuring of deposits with the largest depositors, a process that may take two or three months. “The second quarter would be a realistic target to remove the remaining restriction,” Melngailis said.

As part of the restructuring, the bank is selling bonds to big depositors, who can use more of their funds to buy the securities, which could subsequently be traded. The first such bond sale will go ahead in February, he said, adding that depending on the demand, the bank may again issue bonds in March. The bank has an indication that “several clients are willing to subscribe to these bonds,” he said. “This is very important for us to start doing these types of transactions, also for us to go to the wholesale market for general funding purposes as well.”

Parex had a large non-resident deposit base of investors from countries in the former Soviet Union before it was taken over. It was a run on the bank by some of these large deposit-holders, taking their money out, that was partially the cause of the bank’s collapse in 2008.

Non-performing loans in Latvia are reaching their peak now, said Melngailis, at about 17 percent of the total, and there is a chance for banks to get most of that money back in the next two or three years as real estate prices pick up, increasing recovery rates, he said. The ratio of delinquent loans “is starting to decline,” he said. “And the current provisioning level is adequate for the industry as a whole.”