Konstantin Zhevago
The scam (there's no other way to describe it) involving the $500 million loan secured by MP Kostiantyn Zhevago's Ferrexpo Finance plc, Ferrexpo AG, and Ferrexpo Middle East FZE, using 99% of Poltava Mining and Processing Plant shares as collateral, has once again raised questions about the quality of corporate governance at Ukraine's largest pellet producer, reports Ukrrudprom.
On the one hand, Ferrexpo has a fairly simple and understandable business model for investors (it involves raw material extraction and primary processing), and it doesn't allow for much theft, something that public companies from third-world countries are often notorious for in the West. Furthermore, the economic boom in China and the associated rise in prices for virtually all raw materials are increasing investors' appetite for risk in such ventures.
On the other hand, Zhevago, as Ferrexpo's main shareholder and a typical Ukrainian oligarch who came of age in the turbulent 90s, is trying to profit from everything outside the company's core production process. He's exploiting nuances that few outside shareholders would understand. And even if they did, they're unlikely to have any chance of influencing company policy. At the end of January, Ferrexpo sold its 12% stake completely to Wigmore Street Investments No. 3, a subsidiary of CERCL Holdings Limited, a joint venture between BXR Group and Czech entrepreneur Zdenek Bakala. Bakala had once partnered with Zhevago on a number of projects. Together, they oversaw the supply of raw materials to the US Steel Košice steel plant in Slovakia. And then, at the height of the commodities boom, Bakala (the second-largest shareholder) demonstratively exited Ferrexpo.
The consequences were immediate. Ferrexpo's stock price plummeted by 8% on January 26-27 (though it gradually recovered). But more significantly, in April, the Kachkanar Mining and Processing Plant (part of Roman Abramovich's Russian Evraz) shipped its first 10-ton shipment of pellets to US Steel Košice. Until then, Ferrexpo had been the only supplier of pellets to the Slovak steel plant, but the fallout between Zhevago and Bakal destroyed this quasi-monopoly.
It's possible that one of the reasons for these tensions was Zhevago's desire to take out a new, large loan. Although Ferrexpo fully repaid $420 million in pre-export financing in August 2016, the company continues to service a $350 million credit line maturing in August 2018. Furthermore, in July 2015, holders of Ferrexpo's $346 million Eurobonds finally approved their restructuring, deferring their repayment until April 7, 2019. If the $500 million loan is successful, the company's total debt will rise to $1,2 billion, more than exceeding its annual revenue (just under $1 billion in 2016). Moreover, the banks will hold as collateral the company's main production asset, Poltava Mining and Processing Plant, where not only is more than half of Ferrexpo's ore mined, but also where all of the company's ore is processed into a premium product—pellets. Not to mention the iron ore reserves, the lion's share of which are also concentrated at Poltava Mining and Processing Plant.
Ferrexpo's debt load raises questions, as does its operating model in Ukraine. While its British parent has consistently posted profits over the past three years (2014: $183 million, 2015: $31 million, 2016: $189 million) and will even pay shareholders dividends again this year after a year-long hiatus ($39 million), its main breadbasket, Poltava Mining and Processing Plant, is constantly posting losses. To be fair, while profits in 2014 were 1,7 billion hryvnias ($143 million), they rose to a staggering 5,9 billion hryvnias ($270 million) in 2015, and fell to a paltry 32 million hryvnias in 2016.
Clearly, such a model for a British company operating in Ukraine is only possible if the State Fiscal Service is staffed by deaf-blind, dumb, and blind people who are constantly being slapped over the head by Bankova, thereby forcing them to overlook obvious tax crimes. It's hard to call this business model sustainable. It's a localized "deal"—expropriating profits earned from the exploitation of Ukrainian mineral resources to international offshore jurisdictions—that could end at any moment. In that case, Konstantin Zhevago will become a defendant in a large-scale criminal case for tax evasion amounting to billions of hryvnias, rather than the current paltry accusations of receiving a $480 salary as a Ukrainian MP and a 7 Swiss franc pension as executive director of the British company Ferrexpo PLC.
Incidentally, it is precisely the aforementioned "tax maneuvers" that are currently preventing Zhevago from negotiating with Western banks for a loan secured by the Poltava Mining and Processing Plant. Clearly, the cumulative loss of the collateral over three years, amounting to over $410 million, is not conducive to obtaining a syndicated loan of half a billion dollars.
As a reminder, BNP Paribas, the organizer of the loan syndication for Ferrexpo, planned to close the deal on July 31st. However, at that time, the amount of the loan was $350 million. Ultimately, the funds were not raised by the deadline, as the banks demanded that the Poltava plant be used as collateral. In response, Zhevago demanded an increase in the loan amount to $500 million. Ferrexpo has only provided a more or less clear explanation for how the funds will be used for $200 million.
It's expected that $150 million will be spent on expanding existing production facilities, with another $50 million for maintenance. Naturally, the use of the remaining $300 million, which will be received from Western banks, raises questions. It's possible that Konstantin Valentynovych will experience another "investment crisis." UkrRudProm previously reported on a series of unsuccessful purchases that Zhevago made using funds from Ferrexpo and other areas of his business.
In July 2013, Zhevago's Kerch-based Zaliv shipyard announced the signing of an agreement to purchase the shipbuilding division of Norway's Bergen Group ASA. For $18,2 million, Zaliv acquired a 51% stake in the newly created company. The Fosen and BMV shipyards, both owned by Bergen Group, will be transferred to this company. Following the completion of the transaction, both shareholders jointly contributed 50 million kroner ($8,36 million) to the new company's working capital for further development. Additionally, the company received approximately $40 million from Zhevago's entities to finance the construction of the ships.
In early September of that year, Zhevago acquired VA Intertrading, a major commodities trader. VA Intertrading's founder and largest shareholder, Voestalpine Group (Ferrexpo has been a major supplier of iron ore to the Austrian concern's metallurgical plants for many years), announced the sale of a 38,5% stake in the trading company to entities belonging to a Ukrainian oligarch for "several tens of millions of euros."
In September of that same year, it was announced that Ferrexpo had acquired 15,5% of the Brazilian mining company Ferrous Resources, operating in the Minas Gerais iron ore basin, since January 2013. A total of $82 million was paid for this stake.
Ultimately, all these foreign investments went to waste. The purchase of the Norwegian shipyards became meaningless after the annexation of Crimea, which deprived Zhevago of control over the Kerch Bay and, consequently, any prospects for establishing production cooperation with the Bergen Group.
In the case of the acquisition of Brazilian Ferrous Resources, Ferrexpo was forced to write off half the value of this "investment"—$40 million. The British company's report cites the decline in iron ore prices as the reason for this investment failure.
The same crisis in the commodity markets also finished off the acquired Austrian trader VA Intertrading: it is obvious that it is impossible to make money in a stagnant market overflowing with cheap commodities.”
It's possible that the "extra" $300 million received from Western banks using the PGOK as collateral will be spent on projects of similar quality and with the same efficiency. After all, Ferrexpo effectively lacks such a crucial element of corporate governance as independent directors. While the positions exist, independence (at least from Zhevago) is nonexistent.
It was Ferrexpo's board of directors who, in its 2014 annual report, approved the decision to keep the company's accounts at Finance and Credit Bank, which had been in a zombie state since 2009 (delaying payments from legal entities and failing to return deposits to individuals). But, more importantly for the "independent" bankers, it was still owned by Zhevago. As a result, when the bank was finally declared insolvent in September 2015, the British company suddenly lost $175 million in its Finance and Credit accounts.
Ferrexpo could have recovered the money if the Deposit Guarantee Fund and the National Bank of Ukraine had managed to sell the assets of companies, typically affiliated with Zhevago. However, Ferrexpo's majority shareholder is doing everything in his power to prevent this money from reaching the British company. After all, he owns only 50,3% of it. Meanwhile, in Avto KrAZ and Rosava, for example, which owe Finance and Credit over UAH 2,2 billion, he controls almost 100% of the capital. As a result, the trench warfare between Zhevago's lawyers and the National Bank for control of assets held as collateral by the regulator has been ongoing in domestic courts for the second year.
In April of this year, hope arose that the NBU would at least be able to recover the property that Zhevago had pledged as collateral for refinancing loans provided to Finance and Credit in 2009. The Kyiv Commercial Court upheld the National Bank's claim and ordered the foreclosure of the property of Kyiv Shipbuilding and Ship Repair Plant PJSC—the guarantor for the refinancing loan granted to Finance and Credit Bank PJSC—in the amount of UAH 287 million. Incidentally, the NBU has filed approximately 20 similar lawsuits against Zhevago's entities.
However, on August 21, the same Commercial Court, under a trumped-up pretext (the reason being a meager and apparently fictitious debt), initiated bankruptcy proceedings against the Kyiv Shipbuilding and Ship Repair Yard, thereby freezing the transfer of the company's assets to the NBU and, accordingly, the repayment of Finance and Credit's refinancing debt.
Clearly, the biggest victims of Zhevago's deviant behavior are the creditors of his bankrupt bank, who are not protected by state guarantees. Primarily, these are the companies that, like Ferrexpo, held their funds in accounts with Finance and Credit. And, more fundamentally, these are the minority shareholders of the British company. Unlike Ferrexpo's majority owner, they have no opportunity to profit from this inherently painful conflict of interest, which is so irritating to the ego.
To be continued ...
On the topic: Konstantin Zhevago. The rise and fall of a dollar billionaire.
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