EBRD to collect on Parex 'put' option

A Finance Ministry spokesman told Bloomberg's Aaron Eglitis Friday that Latvia is preparing to pay back tens of millions of euros to the European Bank for Reconstruction and Development (EBRD) for its role in the 2008 bail-out of Parex Bank.

The world financial news source was told Latvia plans to make a payment to the EBRD under the terms of a little-known guarantee the lender has on its investment in Parex Banka, which was rescued from the brink of collapse in 2008 and later restructured into both Citadele and the debt-recovery firm Reverta.

The EBRD holds a 25% stake in Citadele and a smaller stake in Reverta.

Latvia is preparing to transfer the money in December, Finance Ministry spokesman Aleksis Jarockis confirmed by phone, without specifying the amount.

However, according to an estimate given to Bloomberg by Professor Morten Hansen of the Stockholm School of Economics in Riga, the payment could be around €95m - considerably more than the €74 recently agreed for the 75% stake in Citadele that was agreed with investors led by US private equity firm Ripplewoood Holdings.

But contrary to some reports, the EBRD is not disposing of its holding in Citadele - it will pocket the money while retaining its stake into the future.

Making the massive one-off payment will raise the budget deficit by 0.4 percentage point to 1.5 percent this year, the European Commission (EC) estimated in an assessment of Latvia's budget plans.

That in turn will mean budgets will have to be tightened in other areas to compensate for the huge payment to the bank. 

"The government needs to decide on how to deal with its financial dues according to the agreements with the EBRD, and these dues must be paid," Privatization Agency representative Guntis Kārkliņš told LSM Friday, but refrained from further comment. 

The EBRD invested 51.4 million lats ($90.9 million) for 25 percent of Parex plus one share in 2009 and along with a €22 million euro subordinate loan. Guntis Karklins, a spokesman for the state asset sales department, declined to comment on the guarantee contract, saying the deal’s terms are confidential.

In July Dutch Finance Minister Jeroen Dijsselbloem admitted in response to questions from lawmakers that the EBRD has a so called 'put option' on its stakes in Citadele and Reverta.

Put options are clauses that guarantee the price of an asset will not be allowed to fall below a set level, giving investors a guarantee that their investment will be protected. 

Latvia pitched in €1.7 billion to Parex in 2009, which included an increase in capital and liquidity in addition to state guarantees.

 

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