Cyprus Mail
Cyprus

Little hope for bondholders

A bondholder protest last year outside the House of Representatives that got nasty
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By Angelos Anastasiades

THREE options are to be put on the table to solve a claim of €975 million against the Bank of Cyprus made by bondholders who say they were miss sold high interest securities wiped out in the bail-in.

The government has come up with the choices to settle the Capital Securities Association’s (CSA) claim against the Bank of Cyprus in connection with investments in Convertible Enhanced Capital Securities (CECS), which it will present and discuss with the association on Tuesday, a government source told the Sunday Mail.

Of the three, the source added, only one appears realistically implementable, meaning the discussion is likely to turn into a take-it-or-leave-it standoff.

Though the government has kept the nature of the options close to its chest, the Sunday Mail has learned the sole feasible proposal will include some form of arbitration by a court, a prospect deemed anathema by the association because of the protracted periods of time the overloaded justice system takes to see a case through.

Nevertheless, the association will receive a letter in the coming days from Finance minister Harris Georgiades inviting them to the table for a final decision.

Meanwhile, on Friday the association met Bank of Cyprus board member Mike Spanos, who reiterated the bank’s position of no group settlement.

According to CSA chairman Phivos Mavrovouniotis, Spanos appeared uninformed of much of the evidence backing the bondholders’ claims, and the association delegates spent much of the meeting updating him. Spanos committed to reviewing the material and evaluating the prospect of a follow-up meeting.

The issue dates back to the late ’00s, when the Bank of Cyprus and now-defunct Laiki Bank issued the first of a series of CECS, an exotic financial product that offered high yields at high risk.

Of some €2.5 billion issued by the two lenders, most of the securities were purchased by institutional investors, but over €1 billion was sunk by private individuals now claiming that the bonds were presented to them by their bankers as something of an equivalent to bank deposits, which they most decidedly are not – for example, the issuer (the bank) can opt to buy these bonds back, or not, meaning the investor may never see his or her funds returned.

Following the March 2013 events, which left Cyprus with a banking system all but nuked, the CECS issued by the Bank of Cyprus and Laiki were wiped out. Bank of Cyprus’ securities were technically turned into ‘Category C’ bank equity, which basically means they are so far down the line of priority they have zero chance of ever approaching their original value.

The very complexity of the product meant that, by law, banks could only offer it for sale through licensed investment advisors, who were obligated to explain the securities’ nature and risks to lay ‘investors’. The advisors were also supposed to have appraised every individual’s financial needs and situation and devised an “investment profile” to guide investment advice.

“That never happened,” Mavrovouniotis told the Sunday Mail. “In my case, I received a phonecall from my banker to come in for a great business opportunity. When I went in, I was told by the grinning salesman that it was the last day these bonds would be available, and that I was contacted because the bank wanted to reward its good customers. He accounted for the higher interest with the fact that ‘the bank would hold my money for five years’, implying I would get my money back after that – which was simply not true, because these bonds were open-ended, and the option of redeeming them lied squarely with the bank.

“Furthermore, I was reassured that I was virtually going to keep my deposits for as long as they held on to my money, because the bank would, on my request, grant me a loan for the equivalent of my bonds’ value at interest guaranteed to be equal or lower to that payable by the bank on the bonds. Which turned out to have been true, only now the bonds are worthless and we’re stuck with the loans.”

The bondholders’ complaints triggered a parliamentary probe that suggested irregularities in the two banks’ practices. Also, in September 2013 both banks were found by the Central Bank of Cyprus to have “violated the Investment Services and Activities and Regulated Markets law of 2007”, and a €4,000 fine was imposed on the Bank of Cyprus. Sources from the bank told the Sunday Mail that the fine related to “insignificant” instances – a claim strengthened by the equally insignificant fine imposed.

The bondholders demanded their money back, and it is with these arguments that Mavrovouniotis met with anyone who would listen, trying to convince them of the need to expedite settlement of this matter and citing threats to the very survival of many members of his association as a result of the banks’ actions.

Among those who met him was former BoC board chairman Christis Hassapis, the University of Cyprus Financial Economics professor selected to steer the bank through the impossible challenges posing it post-haircut. Mavrovouniotis has repeatedly claimed that in one of their meetings over the summer of 2014 Hassapis explicitly acknowledged the legitimacy of the association’s grievances and pledged to propose an out-of-court settlement to his board.

“I asked him ‘do you accept that we were defrauded?’” said Mavrovouniotis. “He said ‘is there any doubt? They tried to sell me these bonds, too, but I am a finance professor and didn’t take the bait. I’ll definitely take your request for an out-of-court settlement to my board’.”

A subsequent audience with President Nicos Anastasiades in September 2014 seemed like a step forward. In attendance were Hassapis, Mavrovouniotis, Georgiades, Central Bank governor Chrystalla Georghadji, and Cyprus Securities and Exchange Commission chairwoman Demetra Kalogirou.

Anastasiades asked the room for proposals, and according to Mavrovouniotis, “everyone offered their two cents except for Hassapis, so the President ventured a proposal of his own as food for thought, and asked for a workable plan by October 15, which never came”.

A demo outside the Bank of Cyprus
A demo outside the Bank of Cyprus

Anastasiades’ brainstorming exercise was more storm than brain. Each bondholder was to receive a cash compensation up to €100,000 – presumably from the Bank of Cyprus, though not explicitly stated at the meeting – with any further claims to be repaid in BoC stock to the tune of 47.5 per cent, and 52.5 per cent in government bonds, post-dated to sidestep any objections from Cyprus’ international creditors.

Aside from the obvious impossibility of persuading the BoC’s shareholders to voluntarily dilute their own stakes by voting to issue hundreds of millions’ worth of new stock only months after injecting €1 billion of their own cash into the troubled lender, the President’s ‘what-if’ scenario included the use of taxpayer money to compensate individuals ostensibly defrauded by a private company, with nothing to show for the spend. The idea was killed, quietly and unceremoniously, shortly after it was floated.

Though the “is-there-any-doubt” quote attributed to Hassapis is disputed – “such a thing never happened”, said a source present at the meeting – the fact is that the out-of-court settlement issue didn’t make it onto the BoC board’s agenda until a few weeks ago. On December 19, 2014, Hassapis had already been replaced at the helm by Josef Ackermann, the Swiss former Deutsche Bank boss, and the bondholders took the issue to him, too.

This meeting proved to be a turning point, not because Ackermann was particularly helpful in breaking the deadlock – “he had no idea about the bondholders’ demands, or the nature of the issue”, said Mavrovouniotis – but because it finally brought things to a head, putting an end to the vacillating back-and-forth of previous years and precipitating a solid response by the bank.

In a letter to the association dated January 27, the BoC said it was prepared to do very little.
“It is with regret that we inform you that any proposals relating to any collective or general compensation schemes cannot be accepted or effected by the Bank as there is no adequate legal basis that will support such actions,” it argued.

And not only is there no “legal basis” for any compensation, the BoC can’t afford to compensate everyone, the letter added. All it was prepared to do was consider “alleviating the pain” of socially affected and vulnerable categories of people.

Unofficially, the bank argued that the association has members in its ranks considered “informed investors”, like partners at big accounting firms, high-level bankers, and professionals at investment firms, who were, or should have been, aware of the risks they were undertaking when they invested in CECS, and thus entitled to no compensation after their investments went bad.

These “informed investors” are thought to be hiding behind the little guys, who truly fell victim to their own ignorance, in order to secure a blanket settlement that will unduly benefit them, too.

“Several of these instances involved many millions,” a source from the BoC said. “Am I going to compensate the investor who placed €10 million and claims he was tricked into this?”

But, although he acknowledged the existence of multi-million investors, Mavrovouniotis flatly rejected the syllogism.

“The law does not specify amounts – it only distinguishes between institutional and private investors,” he argued. “Private individuals who were urged to invest without being properly informed were defrauded, no matter the amount. Period.”

Such entrenched positions leave little room for optimism. The government and the bank would like nothing more than “this thing to go away”, but have neither the cash nor the stomach to pay for it. The bondholders want their money back in full, will settle for nothing less, and promise “unprecedented” measures against the target of their indignant rage – mainly, but not solely, the Bank of Cyprus. In a classic “no-win” conundrum, the principals are left with no good options, and compromise seems out of sight, let alone reach. Save for the unlikely rabbit out of the government’s hat, the economy can only look ahead to more turbulence, starting this week.

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