impact of different models of creation and financing on BS` of the SoBs and State Budget

1. State-owned PARC: impact of different
models of creation and financing on
BS` of the SoBs and State Budget
Prepared by: V. Strakhova, M. Demkiv
Prepared on request of Mr. Mikhailo Dovbenko, First Deputy Chairman of Financial&Banking Committee

2. Methodology and hypothesis (1/2)
Input data for test (theoretical) case:
• nominal value of non-performing portfolio - UAH100 bn
• provisioning - 80% (UAH 80bn)
• Real value of NPL (based on market evaluation) - 10% (UAH 10 m, i.e. discount – 90%.
• Target value of capital adequacy ratio for re-capitalization calculations - 12%.
• OPEX for PARC - UAH 50 m. annually
• Predicted tenor of functioning - 10 years.
• We use three scenarios of performance regarding NPL recovery: conservative, basic and
optimistic. 30%, 50% та 80% recovery ratio from balance value accordingly (balance
value = nominal value - provisions).
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3. Methodology and hypothesis (2/2)
Assumptions for test (theoretical) case:
• Quality of portfolio will not worsening;
• We didn't calculate impact of possibility of borrower's PD changes;
• We didn't calculate impact on currency position of SoBs;
• Main parameters of government bonds issues for re-capitalization needs:
UAH-nominated, fixed interest rate 9.7% and maturity period of 10 years;
• We use assumption of stable exchange rate.
• Balance value = nominal value - provisions.
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4. List of possible models of assets transferring
• Sale of NPL of SoBs for UAH 1
• Sale of NPL of SoBs for market value
• Sale of NPL of SoBs for balance value
• Sale of NPL of SoBs for nominal value
• Usage of outsourcing scheme (assets didn't transferring, PARC obtain success fee
for recovery) – commission scheme
• Additional models:
oUsage of corporate bonds issued by the PARC with the state guarantee
oUsage of corporate bonds issued by the PARC without the state guarantee
oFinancing of PARC through direct cash contribution to capital
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5. Impact on capital needs and budget
costs (undiscounted value)
Models
Bonds for SOBs
recapitalization
Bonds for SOBs
recapitalization
(% costs)
Bonds for PARC
recapitalization
Bonds for PARC
recapitalization
(% costs)
PARC OPEX
Total amount
(undiscounted)
Nominal value 0 0 100 97 0.5 197.5*
Balance value 0 0 20.2 19.6 0.5 40.3
Market value 5.5 5.3 10 9,7 0.5 31.0
“1 UAH scheme” 13.4 13.0 0 0 0.5 26.8
Commission
scheme
5.5 5.3 0 0 0.5 11.3
Based on test example, UAH bn.
5
* - there are additional incomes to budget in such case (as dividends and profit tax due to release of provisions) – UAH 76.6
bn

6. Impact on capital needs and budget
costs (discounted value)
Models
Bonds for SOBs
recapitalization
Bonds for SOBs
recapitalization
(% costs)
Bonds for PARC
recapitalization
Bonds for PARC
recapitalization
(% costs)
PARC OPEX
Total amount
(discounted)
Nominal value 0 n/a 100 n/a 0.3 100.3*
Balance value 0 n/a 20.2 n/a 0.3 20.5
Market value 5.5 n/a 10 n/a 0.3 15.8
“1 UAH scheme” 13.4 n/a 0 n/a 0.3 13.7
Commission
scheme
5.5 n/a 0 n/a 0.3 5.8
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Based on test example, UAH bn.
* - there are additional incomes to budget in such case (as dividends and profit tax due to release of provisions ) – UAH 76,6
bn

7. Comparative analysis of effects
Models /
Effect (= cash flow from PARC minus budget costs, discounted value, in
accordance with appropriate scenarios of recovery, UAH bio
Scenarios of Recovery
(from balance value nor
nominal)
Conservative (30%) Basic (50%) Optimistic (80%)
Nominal value -19.7 -16.9 -12.8
Balance value -16.4 -13.7 -9.5
Market value -11.7 -8.9 -4.8
“1 UAH scheme” -9.6 -6.8 -2.7
Commission scheme -1.7 1.1 5.2
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Based on test example, UAH bio.

8. Conclusions and comments
• The most cost-effective model is “Commission scheme”, but in such case there will be obstacles for
PARC during litigation process + necessity of constants cooperation SoB+PARC.
• Second most effective model is “1 UAH scheme”. In this case SoB will recognize maximum losses (in
amount of balance value of NPL), as a result, they will need recapitalization.
• In case of purchase for market value SoBs will need significantly less money for recapitalization, but
there will be need in Bonds for PARC recapitalization. Also in such scheme there will be a bit longer
process to carrying on evaluation and its confirmation.
• In case of purchase for balance value, there will no need of recapitalization of SoBs at all. Instead
there will be need in larger amount of bonds for PARC.
• Purchase for nominal value is the most expensive option and possibly may lead to negative legal
consequences for executors (both on PARC and SoB / Ministry of Finance sides).
• In case of usage of additional scheme: bonds, issued by PARC under state guarantee will have same
results. And in case of absence of state guarantee, there will be less costs, but we predict lack of
potential investors at the initial stage
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9. Assumptions for practical case (data for three
SoBs without PrivatBank at 01.07.2017):
Criteria of NPL, that will be transferred (Corporate only):
• for Oschadbank loans with past-due 90+ days.
• for Ukreximbank & Ukrgasbank – 5th
class (the worst) due to risk-
assessment according to NBU regulations (in FS represented as past due
and impaired at individual basis and impaired loans respectively).
Average provisioning according to reporting – 80%, our assumption for
market value – 10%, so if Bank made provision more than 90% – we apply
its figure, in other case – 90%.
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10. Models /
Effect = cash flow from PARC minus budget costs, discounted value, in
accordance with appropriate scenarios of recovery, UAH bn
Scenarios of Recovery
(from balance value not
nominal (!) )
Conservative (30%) Basic (50%) Optimistic (80%)
Balance value -15.4 -12.8 -8.9
Market value -10.9 -8.4 -4.5
“1 UAH scheme” -9.0 -6.4 -2.5
Commission scheme -1.6 1.0 4.8
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Comparative analysis of effects at practical
case
Based on real BS`s of Oschadbank, Ukreximbank and Ukrgasbank, UAH bn.