Fighting Armed Gangs Becomes New Page in Creditor Handbookby and
Billion-dollar saga over Ukrainian farming operation
Courts challenge founding family of Mriya Agro Holding
Hundreds of miles from the front lines, the sleepy farm town of Khorostkiv dodged the bloodshed and havoc of the military conflict that ravaged Ukraine for more than two years.
So the armed attack before dawn on July 1 came as a shock to the warehouse guards, who were easily overpowered by about 30 interlopers. Winter is coming, and the intruders are still there, securing a complex that holds a squadron of lorries and piles of spare parts.
The fight over a site holding about $2 million of farm equipment represents the latest twist in a billion-dollar saga that began in 2014 over the fate of one of Ukraine’s biggest agricultural operations, Mriya Agro Holding Plc. Creditors, who have taken over the company, want the founding Guta family, whose gun-toting gang they say stormed the complex in Khorostkiv, to accept court orders to give up.
The standoff “is making it harder for Mriya to go back to normal,” said Simon Cherniavsky, the company’s chief executive officer since February 2015 after creditors took over control of the company.
In a nation where lawmakers brawl in parliament, a confrontation over a troubled company’s assets may not be that striking. But it’s far from the norm for global fund managers and underscores the risks of investing in frontier markets.
“When creditors took over they didn’t expect anything like that,” said Alexander Paraschiy, head of research at Concorde Capital, a Kiev-based investment company. “It’s something they probably never had to deal with elsewhere.”
But as Ukrainian courts push the restructuring process along, officials in Kiev see progress.
“We very much welcome what Mriya has been able to do,” the central bank governor, Valeria Gontareva, said in a television interview on Sunday. “I can say that this is the first effort of this kind in our country.”
The company dates to 1992, soon after the independence of Ukraine from the Soviet Union, when Ivan and Klavdiya Guta started purchasing land leases and machinery in the west of the country. Mriya, Ukrainian for “dream,” became one of the largest agricultural companies in the country, farming wheat, rapeseed, sunflower and barley in an area as big as the U.S. state of Rhode Island, close to border with Poland and Romania.
They sold a stake on the Frankfurt Stock Exchange in 2008, reaping $90 million from investors. While western Europe spun into the Greek-spawned financial crisis, Mriya’s shares rose to 8.20 euros in February 2011, almost three times the IPO price. They sold $650 million of dollar-denominated bonds in the next two years and received loans from the World Bank’s International Finance Corp. and the European Bank for Reconstruction and Development.
That was the peak.
The deepest recession on record in 2014 and a 70 percent devaluation of the hryvnia against the dollar followed. Mriya defaulted on its bonds at the end of 2014, which are now quoted at about 6 cents on the dollar, according to data compiled by Bloomberg.
What’s more, creditors now say, the books were cooked.
“It became apparent that numbers reported by management were grossly inflated despite being signed off by international auditors,” said Giovanni Salvetti, head of Rothschild for former Soviet republics, who is advising the creditors. While the company reported $230 million of earnings before interest, taxes, depreciation and amortization reported under the Gutas, the actual number was between $60 million and $70 million, he said.
A spokeswoman for Ernst & Young in Kiev, the auditors of Mriya’s accounts before creditors took over, declined to comment.
“Even before the default, something in their figures was wrong,” said Yaroslav Udovenko, a managing partner at Empire State Capital Partners, an investment advisory firm in Kiev. “They were engaged in large transactions with related-party companies, profitability was too high compared to their peers, while they were investing too much money to buy leases.”
In January 2015, Ukrainian authorities started looking for Mriya’s former CEO Mykola Guta. Interpol added him to its “wanted” list on fraud charges. The Ukrainian Ministry of Justice said he took more than $100 million. After he left the country, creditors installed new management in February 2015.
Interpol declined to comment on Mykola Guta and referred questions about him to the Ukrainian national authorities.
Mykola, his brother Andriy, and parents Ivan and Klavdiya, were shareholders in five offshore companies based in the United Arab Emirates and operating under British Virgin Islands law as of 2015, it emerged in leaked documents known as the Panama Papers.
One of these companies, HF Asset Management Limited, held 80 percent of Mriya, according to the bond-offering documents. It was deactivated in December 2014 and struck off in October 2015, according to the Panama Papers.
Calls to Mykola Guta in Switzerland were left unanswered, while his Ukrainian mobile phone was switched off. Andriy Guta didn’t return Facebook and LinkedIn messages; representatives of the Gutas didn’t reply to e-mail messages and phone calls.
While the former CEO Mykola Guta is in Switzerland, the new management also filed lawsuits in Ukrainian courts against members of the family who sat on the board of Mriya, Cherniavsky said. Ivan Guta’s new farming venture was seized in June following a Ukrainian court order, according to a document seen by Bloomberg.
Almost two years after the change in management, bondholders agreed with banks earlier this month to cut Mriya’s $1.1 billion debt by 70 percent, while formally taking control of the equity, the company said in a statement.
The banks include BNP Paribas SA, Credit Agricole SA and UniCredit SpA, while bondholders include Argentem Creek Partners, CarVal Investors, DuPont Capital Management, Pioneer Investment Management and T. Rowe Price Group Inc., according to people familiar with the matter, who asked not to be identified because the identity of creditors is private.
“We have been working closely with the government of Ukraine, other governments and the management team to ensure a favorable outcome for all stakeholders,” Dan Chapman, CIO of Argentem Creek, wrote in an e-mail. “Much remains to be done, but we are optimistic.”
Representatives for BNP Paribas, Unicredit, DuPont, Pioneer and T. Rowe Price declined to comment on the deal, while representatives for Credit Agricole and CarVal didn’t return calls and e-mails seeking comment.
Chasing the gang from the Khorostkiv site -- by legal means -- is just the beginning of the creditors’ plan to recover as much as 45 percent by 2023.
Creditors are eyeing tractors and other machinery they allege the former shareholders sold illegally, according to people familiar with the creditors’ plans. They are also seeking to retake control of about 60,000 hectares of land purchased with Mriya’s cash but now in the hands of other companies, the people said.
“Mriya shows that there is a chance to fight back against the power of certain shareholders that consider foreign lenders weak counterparts, even in a country as complicated as Ukraine,” Rothschild’s Salvetti said. “The legal system in the end held up and helped creditors taking legitimate control.”