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Document Type

Case Study

Case Series

Ad hoc Capital Injection

Abstract

Heading into the Global Financial Crisis, JSC Parex banka was Latvia’s second-largest bank in terms of assets, comprising 13.8% of total assets in the Latvian banking sector. In autumn 2008, Parex faced a capital shortfall owing to massive credit and market losses in addition to increasing liquidity problems and deposit runs of 240 million Latvian lats (LVL; USD 428.6 million). Parex’s capital adequacy ratio fell below the regulatory minimum of 8% on October 28, 2008. Parex had two senior syndicated loans maturing in February and June 2009, totaling EUR 775 million (USD 992 million). Latvian authorities doubted that Parex would be able to pay back, extend, or replace these loans. Authorities intervened at the beginning of November 2008 to provide a liquidity facility and take control of the management; they also committed to injecting capital. The parliament revised its laws on November 14 to enable the Treasury to lend funds to the Latvian Privatization Agency (LPA) for that recapitalization. The Latvian government also invited the European Bank for Reconstruction and Development (EBRD) to become a shareholder in Parex to reassure stakeholders, given the EBRD’s reputation and experience in bank restructuring. From May 2009 to December 2010, the government provided LVL 313.6 million in Tier 1 capital and LVL 50.3 million in Tier 2 capital. Recapitalization was also achieved by converting LVL 152.5 million of liquidity support to equity. In August 2010, the LPA split Parex into a remaining bad bank, Reverta, and a new good bank, Citadele. The two majority shareholders who owned 85% of Parex were effectively wiped out, while the minority shareholders and subordinated debtholders ultimately received nothing for their investments. The government fully compensated the senior syndicated lenders on a revised schedule. Insured depositors also were protected. Citadele was sold for EUR 74.7 million to Ripplewood Advisors LLC and a group of 12 international co-investors in April 2015, at which point the EBRD still had a 25% stake. The EBRD lost its investment in Reverta when it sold its stake to the LPA for EUR 1 in March 2017. Reverta went into liquidation in July 2017. The state had lost EUR 428.8 million in share capital and EUR 339.7 million in liquidity support for a total loss of EUR 767.5 million as of December 2022.

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