Nomura delivers Parex restructuring plan

  • 2010-03-25
  • From wire reports

RESHUFFLE: Once the restructuring is approved, the bank will target lending to small and medium sized businesses.

RIGA - The restructuring model for Parex bank proposed by the consulting company Nomura International, which was hired by the Latvian government, calls for transferring all the bank’s ‘good,’ or ‘core’ assets to a new bank, which is yet to be founded, reports news agency LETA. Nomura considers splitting core assets from non-core assets to create a new bank on the basis that the core assets, separately, would better meet the interests of potential investors who are currently waiting for the decision on the bank’s future. The ‘none-core,’ or ‘bad’ assets would remain in Parex. 

On March 16, the government started discussion on models for restructuring the state’s bailed-out Parex bank. Prime Minister Valdis Dombrovskis (New Era) has said that “the most promising option for restructuring the troubled bank is to take the core assets of Parex and establish a new bank on their basis. The government hopes it will allow it to recover its investments, but it is premature yet to predict how much of the financing that has been invested in the bank could be recovered as a result of the restructuring. Also this model complies with the European Commission’s requirements regarding the restructuring,” reports the Latvian Institute.

Finance Minister Einars Repse (New Era) added that “The splitting of assets and liabilities will begin only when the bank’s restructuring plan is approved by the European Commission. After the restructuring the bank will be able to resume lending, as Parex has already reached an agreement on a source of funding for small and medium sized Baltic businesses, which will give it an important role in the region’s economic recovery strategy.”

According to the Finance Ministry, the benefits of the model suggested by Nomura include its compliance with the interests and requirements of the European Commission and the European Bank for Reconstruction and Development, a positive ‘PR’ effect and improving the bank’s reputation. The new bank would also have good liquidity and capital adequacy ratios.
The negatives include the risk of litigation, the necessity of an investment of another 100 million lats (142.8 million euros) from the state budget, and the complicated implementation of such a plan, which eventually could hamper the new bank’s operations.

If a decision is made to establish a new bank on the basis of the existing Parex assets, the state will have to go through the entire process, not just reaching agreements with correspondent banks, but also developing a new banking system, making new investments in infrastructure and other issues. Nomura suggests that the new Parex head offices on Citadeles Street would go to the new bank.

The complicated process of establishing a new bank will increase operational risks, the Finance Ministry points out. As for the high probability of litigation, this is due to the planned asset distribution model: a 52.8 million lats investment into Parex’ subordinated capital by the bank’s former shareholders is to be left with the current bank, which will most probably result in lawsuits being filed by these depositors as well as by several pension funds. Furthermore, the asset distribution is to be done in accordance with a provision of the Law on Credit Institutions that several lawyers consider unconstitutional.
Regarding the bank’s former shareholders, several pension funds and foreign banks, for instance, Deutsche Bank, have invested money into Parex’ subordinated capital, although the bulk of this is made up of investments by the bank’s former owners, Viktors Krasovickis and Valerijs Kargins.

It is planned that assets worth 1.5 billion lats will be transferred to the ‘good’ bank, whereas Parex will be left with assets worth 785 million lats, mostly made up of non-performing loans.
The restructuring strategy offered by the consultant states that EBRD would get 25 percent plus one share in both Parex and the suggested ‘good’ bank.

The restructuring strategy does not mention the price that Parex could be sold for. Previously, unofficial reports said that the state no longer hopes to retrieve all the money it has invested in the bank.
Nordea and DnB Nord Bank, which are already represented in Latvia, as well as Poland’s PKO Bank Polski, Russia’s Alfa Bank, Germany’s Raiffeisen Bank and Erste Bank and several financial investors are mentioned as the potential buyers for the new bank.

The government must deliver the restructuring plan to the European Commission by March 31. Nomura has been hired to develop and implement the plan, and to organize the sale of the bank and any new entity established through the restructuring.