Parex banka reaches landmark loan restructuring agreement

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As G-7 countries struggle to rescue their crippled financial industries, the Baltic nation of Latvia is moving forward with its first bank workout by restructuring Parex banka. Rather than a good-bank/bad-bank breakup, the deal will use government funds to pay back some private obligations, reschedule maturities and boost interest rates on remaining debt.

In June 2007 Parex banka raised a EUR 500m (USD 648m) syndicated loan, the largest ever for a Latvian bank. Less than two years on, Parex is setting a very different benchmark, restructuring the loan as part of a state-funded agreement to stagger payments to foreign creditors over two years, said three sources close to the situation.

Parex banka owes international banks EUR 775m under two syndicated loans – its EUR 500m deal due in June and another facility worth EUR 275m that was due in February. As part of yesterday’s agreement, Parex is only paying a small restructuring fee but its benchmark borrowing costs will rise more than five times, said two of the sources.

The Latvian bank is the first Eastern European financial institution to reach a comprehensive restructuring agreement with syndicated lenders, all three sources said. The bank’s new borrowing terms reflect its much-changed circumstances – a bailout, a state guarantee and last-minute talks with creditors.

“There has been a lot of to-and-fro between the state, the bank and its lenders,” said one of the sources close to the situation. All three factions have been talking since the start of the year and were still hammering out terms this week, he added. In between, Latvia’s Cabinet of Ministers resigned – not an unusual occurrence in Latvia but another complication to contend with, said the source.

Talks involved around 60 banks from North America, Western Europe and Asia. A lender committee comprising Commerzbank, Lloyds TSB, Mizuho and RZB helped coordinate discussions and held several all-bank meetings, as reported.

Parex banka was advised by Blackstone. The Latvian government will provide a guarantee to lenders in both Parex banka’s syndicates and law firm Freshfields has been advising Parex banka on issues relating to its state guarantee, as reported.

Parex came close to collapse in December 2008 after experiencing a run on deposits that prompted the Latvian government to take a 51% stake. Parex has already needed a month-long extension for its EUR 275m loan. The Latvian government now owns almost 85% of the bank and has transferred the stake to the country’s privatisation agency.

The commercial terms of today’s deal require Parex to pay quarterly interest calculated at 300bps over Euribor for the next 12 months, stepping up to 350bps after that, said the two sources. The EUR 275m loan Parex was meant to repay on 21 February was a one-year facility paying 55bps over Euribor, while the EUR 500m loan from June 2007 paid 45bps, as reported. The latest agreement allows the bank to repay EUR 232.5m upfront, EUR 310m next year and the remaining EUR 232.5m in 2011.

Parex will make the first payment today using funds from Latvia’s state treasury, the bank said in a statement.

“The government listened to lenders’ concerns, particularly about the ‘back end’ of the rescheduling,” the source continued. Parex will now make its final repayment in 2011, not 2012, meaning lenders will receive their last installment within the timeframe of the IMF’s support programme for Latvia, the source explained.

‘Plan B’ would have involved a transfer of assets out of the bank and a comprehensive restructuring, said the source. “There was some breathing space after the deadline but not much, and under Latvian law the bank’s directors would have had to consider their positions.” A one-month extension from bank lenders was set to expire on 19 March.

The EUR 500m two-year loan was the high-water mark of Parex banka’s borrowing on the syndicated loan market. At the time, it was rated ‘BB+’ by Fitch and ‘Baa3’ by Moody’s. The bank had also built up a well-established group of international lenders – just five of the 36 financial institutions that committed to the deal were new to the name.

The Latvian bank raised its first syndicated loan in 1998, borrowing USD 20m from seven international banks. In the 10 years that followed, it set a series of benchmarks among Baltic borrowers that culminated in the benchmark EUR 500m deal that was to mature in June this year.

The size of the loans and the number of participants grew in concert with the thriving Eastern European loan market, and Parex’s progress was swift and smooth. It signed a USD 23m loan in 2000; a EUR 35m deal in 2001; EUR 55m in 2003; EUR 117m in 2004; two deals worth EUR 258m in 2005; another two deals worth EUR 510m in 2006; and a EUR 385m loan signed in February 2007.

Its next two deals proved fateful – EUR 500m in June 2007, plus EUR 275m in February 2008; the two deals Parex has spent most of 2009 renegotiating.

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