Cablegate: Romania : Property Fund Is Hiring Professional Managers And

Published: Thu 14 Aug 2008 01:35 PM
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P 141335Z AUG 08
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1. (SBU) Summary: The long process of establishing a property
restitution fund to reimburse former owners of certain expropriated
properties is finally drawing to a close. The four billion Euro
fund has already distributed nearly 20 percent of its outstanding
shares and is in the final stages of completing a listing on the
Bucharest Stock Exchange. The last major hurdle to clear before the
fund is ready to list, hiring a professional asset manager, is
underway. According to the Property Fund's Executive Vice
President, Daniela Lulache, the letters of intent received by the
Fund's board from top asset management companies are impressive.
While at the same time, the President of the National Authority for
Property Restitution (ANRP), Ingrid Zaarour, has made procedural
changes which should allow many of the stickiest outstanding
restitution cases to be brought to a close. End Summary.
2. (SBU) The GOR established the fund in 2005 to compensate victims
of illegal communist expropriation for cases where the actual return
of property is no longer possible, e.g. in cases where a school was
built on the site of a former home. The fund provides financial
compensation by granting shares, to both victims and their heirs, in
a fund comprising state-owned companies and privatized companies in
which the GOR has retained a minority stake. The fund currently
contains shares in 88 Romanian firms, with large stakes in companies
such as: Petrom, Transelectrica, Transgaz, Romgaz, the Romanian Post
Office, Hidroelectrica, EON Gaz Romania, and the Otopeni airport.
Former property owners apply for compensation from the ANRP, which
assesses the current market value of the expropriated properties and
issues damage titles for fund shares. The initial face value of one
share was established at 1 RON (approximately US 40 cents). The
owners of the Property Fund shares will be able to sell them freely
on the regulated capital market.
3. (SBU) The fund is managed by a supervisory board appointed by
the Ministry of Economy and Finance. The current management,
including the executive Vice President, appear highly professional.
They have operated in a manner that protects the fund's assets,
while generating a return for shareholders. They do not have the
scope or authority to dispose of the fund's underlying assets, but
are able to conduct capital market operations to generate additional
dividends. The fund was also designed to be transparent, and
outside companies have been hired to provide accounting and advisory
services. According to George Mucibabici, the Chairman of Deloitte
Romania, Deloitte's recent audit confirmed that the books are being
kept in a manner consistent with generally accepted accounting
4. (SBU) The recently released list of asset management companies
seeking to take over the fund is impressive, and includes several
major U.S. and international companies. Letters of intent were
received from the following U.S. companies: JP Morgan, Blackrock,
Artio Global Management, New Century Holdings, Morgan Stanley
Investment Management, and Goldman Sachs Asset Management. Other
multinational bidders include: HSBC Bank (U.K.), UBS Global Asset
Management (Switzerland), Deutsche Bank (Germany), Royal Bank of
Scotland (U.K.), Barclays Capital (U.K.), BNP Paribas Asset
Management (Austrian subsidiary), and Credit Suisse (Germany), as
well as other smaller outfits. The current management, with the
advice of a GOR-appointed commission, will begin direct negotiations
to select the bidder offering the best mix of experience and
competitive pricing to the fund's shareholders. According to
Commissioner Nicolae Cinteza, Director of Bank Supervision at the
Romanian Central Bank, the commission will complete its work and
hopes to have the management firm take over the fund no later than
January 1, 2009. The new management firm will have input into the
future investment strategy of the fund and will work in conjunction
with the current managers to develop a fund prospectus. According
to Lulache, her long-term idea is for the fund to become a South
Eastern Europe investment fund, investing not only in Romania, but
also in other neighboring countries. However, in the near term the
fund's current assets will leave it primarily focused on the
Romanian energy market. The listing on the stock exchange will take
place once the new management team is in place and the fund
prospectus has been published.
5. (SBU) While Lulache said that she was committed to listing the
fund on the stock exchange, in her opinion, the listing needs to be
pursued at a deliberate, measured pace, taking into account local
capital market conditions. The opposing view, held by Cinteza, is
that the longer listing is postponed, the more opportunities it
creates for unscrupulous businessmen to grab shares at below-market
prices on the unregulated market. While the ultimate goal is to have
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the price per share exceed the face value, according to Cinteza, it
is likely that shares will initially trade in the range of .5-.7
RON. After the initial price fall, the price per share should rise
as the new management company begins to make strategic investments
and the market price adjusts to reflect the expected future
earnings, rather than the current asset value. One concern about
the listing is that at the current estimated value of 4 billion
euros, the fund will likely double the capitalization of the
Bucharest Stock Exchange (BVB). Lulache suggested that the fund
would consider a listing on an additional foreign stock exchange,
most likely in London, to dilute this impact. Having a dual-listed
fund will have the added benefit of making investment more
accessible to foreign portfolio investors, and should result in
higher share prices. Regardless, the initial public offering
remains on schedule for the first half of 2009, with any additional
listings occurring at a later date.
6. (SBU) About 80% of the fund is currently under state ownership,
while 20% is in private hands. The state owned portion is falling
as property restitution cases are brought to a close and claimants
are allocated shares in the fund by the GOR. At present, shares are
allocated at face value (1 RON). After the listing, shares will be
distributed at the market price, albeit using a formula to protect
against market manipulation. By using a weighted average of the
last 60 trades together with the average trading price on the first
60 days after listing, it will be difficult for traders to influence
the number of shares distributed to any particular claimant through
a few large well-timed trades. These provisions will help to
protect the fund and the shareholders if the market turns out to be
less liquid than expected.
7. (SBU) ANRP President Zaarour met with ACS Chief and EconOff on
the Property Fund and restitution issues. She expressed her
frustration with the slow pace of property restitution, blaming the
lack of clear legislation in the years immediately following
independence. She explained that, after years of communism and then
additional lost time in the initial post-communist period, in-kind
restitution has become more difficult to provide. Streets,
factories, and schools have replaced some of the former properties,
while the establishment of a property fund lagged due to the
political opposition of the PSD. Zaarour now believes that
sufficient legislative backing exists to bring Romania's property
restitution saga to a close. She offered to examine any of the
lingering AmCit property restitution cases to see if they could now
be settled under the ANRP's authority. She pointed out that the
legislation governing property restitution has shifted
responsibility from the localities to her agency, giving her
increased authority to settle on a final compensation offer. While
there is a ceiling of RON 500,000 on cash reimbursements, there is
no ceiling on the number of property fund shares that may be
allocated to claimants. Reimbursements for amounts larger than RON
500,000 will be paid using either property fund shares or a
combination of cash and shares, up to the property's current market
8. (SBU) Zaarour also explained in more detail the procedure for
determining the value of expropriated properties. The assessment is
conducted by independent assessors, paid by ANRP, who are required
to work in accordance with international professional standards.
For non-agricultural property, the independent assessors must be
members of the national professional association (ANEVAR). The
assessment attempts to establish a current market price for the
property, using criteria such as location, size, and comparable
sales. Those former owners who have historical records, such as
maps, photos, and old fiscal records will likely be more satisfied
by this process than those possessing more limited information about
the property, according to Zaarour. There is one internal appeal
allowed after the evaluation, either by ANRP or the former owners,
after which an independent arbitration process will set a final
market value in cases of disagreement. The window to file new
restitution cases closed permanently for all types of property in
2005 and Zaarour expressed her hope that all pending cases could now
be expeditiously resolved.
9. (SBU) Begin Comment: The property fund is firmly established in
law and the progress leading up to a stock exchange listing is well
advanced. The fact that so many marquee foreign companies are
jockeying to manage the fund's assets reflects a belief that, once
listed, they will be able to add significant value through the
careful stewardship of the fund's assets. Those who have acquired
shares at the current face value of one RON per share are likely to
see these shares multiply in value in the medium to long term.
While listing on the stock exchange will in some ways signal the end
of this process, the current shareholders are not holding worthless
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paper. The shares are already generating substantial yearly
dividends, and while they cannot yet be sold on the regulated
market, they are providing income to the shareholders.
10. (SBU) One significant benefit deriving from a stock exchange
listing is that the non-regulated market for shares will disappear.
Until a transparent market price has been established, there remains
a concern that the claimants, who have already suffered the loss of
their property, will sell-out for quick cash to the same cast of
characters who enriched themselves on the mass privatization
certifiQes twelve years ago, and miss out on a substantial
monetary return on the property they lost. Another concern is the
caution of American citizens who, having fought years of
interminable battles in local courts and who rightly or wrongly
perceive corruption in every shadow, are unwilling to accept shares
in a property fund. Rather they continue to demand cash or
property-in-kind. Convincing these individuals, despite our
generally positive view of the property fund, may prove difficult.
Furthermore, with national elections expected in November, the
helpful and professional disposition of ANRP could change with a new
government. End comment.
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