Are Private Lender’s Bonds Draining State Aid? Mind the horns!

According to the government’s and the central bank’s (Bulgarian National Bank, BNB) approved plan for First Investment Bank (FIB), 94 million levs in State aid can go into private pockets before FIB repays the money to the budget. Why is this plan a secret? You can find out from Bivol’s investigation who and why is having an interest in this exception of European State aid rules.

FIB on “life support”

FIB received in June 1.2 billion levs in State aid. It was cleared by the European Commission, which disclosed the letter with its conditions – the money to be paid back by the end of November and the State to submit within two months an “individual plan for liquidation or restructuring” of the Bank.

Caretaker Finance Minister Porozhanov explained on August 29, the deadline for the submission of the plan, precisely how it was drawn – this activity was undertaken by the Ministry of Finance and its timeline was fully audited and approved by BNB i.e. the government and BNB would be responsible for its possible failure.

In late November, FIB managed to repay only 300 million levs. The remaining 900 million levs burdened the taxpayers after the government included them in a loan under the modest wording “liquidity support for the banking system”. The Chairwoman of the Budget Committee in the Parliament, Menda Stoyanova, however, specified that this money was precisely for FIB.

In order to allow the aid, the European Commission asked the government for a clear commitment to restructure the Bank and for compliance with the provision of State aid. The commitment for the restructuring was sent to the Commission by a letter of Finance Minister Vladislav Goranov on November 20, and the approval of the Commission was officially announced on November 25.

The European Commission’s communiqué made it clear that FIB should repay the 900 million levs in State aid by May 28, 2016. In addition, the government has committed to impose “several restrictions on the behavior of the Bank during the restructuring period; for example FIB cannot pay dividends; use aggressive commercial practices, and acquire businesses, among and others.

The emergency clause

However, a too scandalous clause can be found in the government’s commitment, Bivol learned from its sources in the Ministry of Finance. The Bank has been allowed to repay the principal and interest on perpetual bonds in the amount of 27 million euro in August 2015 and another 21 million euro in March 2016. The motivation is that if this is not done, there would be an increase of the interest rate.

How much will someone gain from this clause?

This involves two issues of perpetual bonds by FIB’s subsidiary – First Investment Finance – Netherlands. They are described in the portfolio of the parent bank.

http://www.fibank.bg/uploads/_AboutUs/Profile/docs/Fibank_Presentation_EN_2014.pdf (p. 13 and 14)

The last available annual financial statement of the Dutch company shows what their profitability was 12.5% for 27 million euro from August 2005 and 11.625% for EUR 21 million euro from March 2006.

http://www.afm.nl/registers/fv_documents/1560.pdf (p. 8)

The government commitments, sent to the European Commission, show that after ten years there will be a jump in the interest rates of these bonds (to 14.5%, according to unofficial information). Therefore, there is the declared “good” intention of the Bank to repay them before the expiry of the ten-year period. Good, but for whom? For the lucky holders of the bonds, who will receive the following:

– 27 million euro in principal, plus 33.75 million euro in interest for ten years from the first loan in August 2015

– 21 million euro in principal, plus 24.41 million euro in interest for ten years from the second loan in March 2016

The total is 106.16 million euro or 208.29 million levs. Of these, 94.18 million levs are principal. The income from the interest, in the amount of 114.11 million levs, has been probably already collected.

The repayment of the principal represents 10.5% of the State aid of 900 million levs. De facto this money will simply go from taxpayers’ pockets into someone’s private pocket, although

the provision of State aid includes clauses banning the redemption of bonds.

The European directives in such cases are unambiguous. They are regulated to limit the possibility of reducing the total regulatory capital of the bank under supervision.

Such actions may be admitted only exceptionally, after special consideration of each individual case and risk assessment by the Commission. In any case, the European Commission expressly states in its directives that “banks subject to a state aid investigation should consult the Commission before making such transactions” (in this case redemption of perpetual bonds).

The Ministry of Finance: The plan is secret; FIB decides what should be announced

Bivol officially asked the Ministry of Finance the following question – are the exception and the permission for FIB to redeem perpetual bonds in 2015 and 2016 specifically noted in the set of commitments submitted to the Commission?

“Before the announcement of the public version of the decision, disclosure of any element of the commitments could break the confidentiality of elements representing a trade secret,” the response of the Ministry of Finance literally reads.

This clearly means that there is a secret that must be hidden from the public eye. In fact, the secret would be the mere existence of the extraordinary clause, because it is an exception. Its absence cannot be a secret, because the obvious rules are known. The content of the reply of the Ministry of Finance to Bivol and the lack of rebuttal of the existence of the emergency clause actually confirms its presence.

The Ministry of Finance further confirmed the date of the sending of the commitments – November 20. The specification of the commitments, themselves, was, however, denied on grounds that “under the Access to Public Information Act (APIA), the correspondence with the Commission on this occasion does not constitute private information outside the specific decision of the EC; therefore it should not be granted”.

According to the reply of the Ministry of Finance, only FIB can decide which part of the information from the full decision for State aid is to be published and which one is to be concealed in order to protect its trade secrets, while the European Commission is obliged to comply.

“The parties in this case are three and before the disclosure of the public version of the decision and the disclosure of any element of the commitments could break the confidentiality of elements representing a trade secret. The Bank is the addressee of the decision, which is why it should define what a trade secret is and what is not.”

What is the third party in addition to the Commission and FIB? The Ministry of Finance apparently does not consider it to be the sovereign that is providing the money. He, the taxpayer, is not entitled to know what the Bank will to with his money. Indeed, to this day, the public version of the decision is not yet published.

Finance Minister Goranov: No comment… Investigate

Contacted by phone with the question what is the motivation for the exemption for the bonds, Minister Goranov declined commenting, saying: “I will not comment, go ahead and investigate.” He was adamant that public interest is not affected. To the reminder that his signature is the one standing under the commitments undertaken by the government, Goranov said that he has signed lots of things and will sign more.

The European Commission did not answer if there was such a clause and if it knew who holds the bonds

Bivol asked the following questions to the European Commission:

– Is it true that the Commission has authorized FIB to redeem bonds in 2015 and 2016?

– If this is true, had the EC conducted the necessary checks to protect the interests of taxpayers?

– Is the Commission aware who are the persons holding these bonds and whether they have connectivity with the Bank?

The answer of Ricardo Cardoso, Spokesman for Competition, was received on the very same day and stated literally the following:

“The Commission in November 2014 approved a restructuring plan for First Investment Bank (FIB) under EU state aid rules. http://europa.eu/rapid/press-release_IP-14-2124_en.htm

In particular, the Commission found that FIB’s restructuring plan will ensure that the bank continues to be viable in the long-term without unduly distorting competition in the Single Market.

The Commission has carried out the necessary analysis to conclude that all measures approved under its decision are in line with the 2013 Banking Communication and adequately protect the interests of the Bulgarian state.”

As a background note, the reply notes that the Commission does not comment on leaks of information and media publications.

The mentioned Communication from 2013 actually hardens the rules on State aid in crisis situations and requires banks in difficulty to first seek help from shareholders and bondholders, before recourse to public funds.

It is not clear what facts and data have been used in the analyses leading to conclusions of compliance – have they been gathered by the Commission or were they provided by the Bulgarian government? And what happens if the provided information proves incorrect.

Something happened in the EC after Bivol asked these questions and published a series of documents showing huge exposures of FIB to connected parties. Their conclusions disagree with the definition of “viable bank”, which is entitled to receive State aid. Coincidence or not, the Head of the Department dealing with State aid in the Main Directorate “Competitiveness”, Sophie Bertin-Hadzhivelcheva no longer works there. Coincidence or not, she was the one who came to Sofia at the end of last year to defend the need of State aid for FIB.

Our bondholders are much better than you bondholders

If FIB had not received State aid and was declared bankrupt, the bondholders would have assumed the risk and this would have been the end of the story. This is what happened to the bondholders of the failed Corporate Commercial Bank (CCB) that did not pay them the bonds in dollars that matured on August 8.

Why should the Bulgarian government now make this commitment, exactly for these perpetual bonds?

Their interest rate increase after the ten-year period is a problem of the Bank and not the taxpayers. Shouldn’t the State aid be repaid first and exceptions for anyone to not be made?

The question of WHO is holding those 94 million levs in perpetual bonds stands out in full force today. The answer is of overriding public interest because the money is paid by all of us. It is possible that the holders of these bonds are quite legitimate and respectable persons or institutions. However, the lack of transparency in the actions leads to other hypotheses:

– Are they connected with the owners of the Bank?

– Are they people with political affiliations?

– Are they people who sit down for a cup of coffee with Finance Minister Goranov?

Following the revelations of Bivol (see the link) of disproportionately large amounts of exposures, compared to the total capital of the Bank, to entities with unclear ownership and suspicious connections, we are inclined to assume

All of the mentioned above

One thing is clear – SOMEONE is in a hurry to recover their investment in the “bad apple” while it still remains in the basket and not in the dumpster, and the government and BNB are granting explicit favors to them, undoubtedly to the detriment of public interest.

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