CONSEQUENCES OF THE INSOLVENCY OF HIDROELECTRICA Bankers: "What is hard is just to get boulder rolling down the hill, after that it keeps going by itself"

• Banks going up hat in hand to the Ministry of the Economy

• Banking sources: "The insolvency is a warning sign for banks, as they are forced to set up additional provisions"

• Mişu Negriţoiu: "Hold on, we want to screw somebody over, we won't tell you who, and it could potentially happen to you as well tomorrow"

• The Ministry of Public Finance yesterday only raised 94 million lei through a bond issue with a 2016 maturity

The insolvency of "Hidroelectrica" has sparked off harsh criticism of the authorities from bankers, as the company owes commercial banks approximately half a billion Euros.

Bankers are concerned that after Hidroelectrica -"the crown jewel", other state owned companies, local administrations and even government bonds could be next.

The banks have extended loans of hundreds of millions of Euros to the state companies and to the local administrations. Furthermore, the government bonds issued by the Ministry of Finance currently represent the rescue for banks.

This week, after the announcement of the insolvency of "Hidroelectrica", some bankers met with the representatives of the Ministry of the Economy, to find a solution for their exposure to Hidroelectrica".

Bank sources told us that the lenders have asked the government to grant guarantees to the energy company.

The meeting ended with the "dry" conclusion that the state of the loans granted to "Hidroelectrica" depends on the internal regulations of each bank, the aforementioned sources said.

"The insolvency is a warning for banks, which will have to set up new loan-loss provisions", our sources said.

• Moral hazard

The loans taken out from some banks (possibly Citibank and ING Bank) are backed by state guarantees, and for the other banks, the state may also issue government bonds, market sources say.

If the government were to grant state guarantees for the loans taken out by "Hidroelectrica", then they might be considered state aids by the European Commission.

"Why should Hidroelectrica benefit from a preferential lending regime and while Oltchim or other state owned companies shouldn't?", is the question the business sector is asking.

Contacted by the BURSA" newspaper, Bogdan Chiriţoiu, the president of the Competition Council, said that the state guarantees could potentially be viewed as a state aid, but an analysis needs to be conducted.

• Unusually harsh reactions of the bankers

"What is hard is just to get boulder rolling down the hill, after that it keeps going by itself", bank sources say.

The banks which lent to "Hidroelectrica" will set up provisions for the entire exposure, even though the promise was made that the loan installments will be after the company entered insolvency, a counterproductive measure which will affect the loans for other state-owned companies, said Mişu Negriţoiu, the general manager of ING Romania, according to Mediafax.

He said: "The decision of Hidroelectrica is completely counterproductive. There is a lot of unpredictability. If I wanted to bring a lot of money into the country right now, I couldn't. I can't support such a request in any way (...) Obviously, we will become reluctant in financing the state-owned companies. We need to see what we can do in this situation. There is a lot of talk, but in banking you don't make decisions based on what is being said (...) We will unavoidably set up loan loss provisions for Hidroelectrica".

When asked whether bankers and analysts should talk more in-depth to the decision-makers of the state on the potential consequences of such measures, Mişu Negriţoiu said: "What else is left to say? You can't start from scratch. If you don't understand how things work, you don't do it. I've been in those positions and I know what it's like. You can't sleep at night... You can't do a Romanian-style footwork".

He sees a need for a return to predictability in the economy: "This is a simple action, which is looking for a reason, but I don't even know who it is intended for. And so you do a little Romanian scam (...) Hold on, we want to screw somebody over, we won't tell you who, and it could potentially happen to you as well tomorrow. This comes as the cherry on top of the problems which we already have. We are making our situation worse instead of making it better".

• Mihai Bogza: "You shouldn't respond to one swindle with another"

The insolvency of "Hidroelectrica" is more of a cause of concern for Romania than the outcome of the elections in Greece, due to the risk it poses to our country's reputation, said Mihai Bogza, the president of Bancpost.

He said: "In the case of Hidroelectrica, I think that the line of reasoning for the foreign analysts would go something like, if a state-owned company (and one of the biggest) goes bankrupt, then tomorrow or the day after tomorrow - we might see the bankruptcy of a municipality, and in the end, why not, a default on government bonds. (...) It's a move I didn't understand [ed. note: - referring to the forcing of Hidroelectrica into insolvency]. My first reaction was not to believe it. I thought it was a mistake in the news stream (...) The argument was that it represented a solution to get rid of the contracts with the < clever boys >. I respect the economic logic behind that action, but you shouldn't respond to one swindle with another. At least this is not something the Romanian state should do".

Mihai Bogza, who previously held the position of vice-governor of the NBR, said that when the banking sector was restructured "they avoided like the plague" to declare the bankruptcy of the state-owned banks (Bancorex and Banca Agricolă), because such a measure sends a very bad sign, and the reputation risk of the country was placed first at that time.

• Henk Paardekooper: Nothing like has happened in the recent history of Romania

The decision concerning the insolvency of Hidroelectrica was surprising, especially because nothing like this has happened in the recent history of Romania, even though other countries have opted for this type of solution lately, said Henk Paardekooper, the president of RBS Romania.

He also said that the decision of "Moody's" to cut the rating of "Hidroelectrica"

• Claudiu Cercel: "There are worries that other companies might be encouraged to do the same"

The failure of the government bond auction held in the beginning of this week could also be the result of the announcement concerning Hidroelectrica, which has caused some banks not to participate or to ask for a high interest rate, considers Claudiu Cercel, the deputy managing director of BRD.

He said: "What the foreigners are displeased with is not the insolvency (...) but the fact that this can be seen as a violation of the notion of contract in itself. The people in the West look at this situation and they are concerned that it might serve as an incentive for other companies to do the same, perhaps even private ones".

• Steven van Groningen: It is very hard to explain to foreign investors what has happened at Hidroelectrica

It is very hard to explain to foreign investors what has happened at Hidroelectrica and why that company was declared insolvent, especially since there are a lot more state owned companies which are in a far direr financial situation, said Steven van Groningen, the president of Raiffeisen Bank.

He said: "It wouldn't be very hard, for many foreign investors, to name five state owned companies which are in a far worse situation than Hidroelectrica. Do we declare those companies insolvent as well?"

On Wednesday, the Court of Bucharest admitted the opening of the insolvency procedure of "Hidroelectrica", the largest electricity producer in Romania, which was going to be the first company with private management.

The Ministry of Public Finance yesterday raised 94.6 million lei, at rising yields

The Ministry of Public Finance (MFP) yesterday raised 94.6 million lei, following the sale of bonds with a January 2016 maturity. The coupon was 6.28%. The estimative amount of the operation was 400 million lei, and the banks subscribed shares of 717.6 million lei. The Ministry also bonds last month, with a January 2014 maturity, borrowing 1.339 billion lei, at a yield of 6.09%.

In the beginning of this week, the Ministry of Finance rejected the bids of the banks for the 1-year maturity certificates, claiming that the yield was too high. It was the first time since October that the managers of the public debt did not raise any money through a public auction. According to dealers, the yield in the secondary market was 5.85%, which would have amounted to a substantial increase, compared to the yield of 5.29%, recorded on the previous auction. The bids of the banks amounted to 1 billion lei, and the scheduled amount was 800 million lei.

• Aurelian Dochia: "This is not a surprise"

The rising trend of the yields has been clear for some time, the only unknown being the moment when it is going to manifest itself, said economic analyst Aurelian Dochia.

He went on to say: "The rise in yields was to be expected, so what happened does not represent a surprise. What wasn't known was how quickly the markets would move. We have received a negative signal, which does not only concern the government bonds, but will also affect financing in other areas".

Aurelian Dochia considers that the authorities will be forced to accept higher yields on the bonds and treasury certificates issues in the coming period in order to be able to sell them.

The yield of yesterday's securities is the highest since the auction which took place four weeks ago, when 417.2 million lei in bonds were sold, at a yield of 6.40%. The Ministry of Public Finance has announced that it intends to borrow 3.5 billion lei from the local banks this month, through five issues of treasury certificates and government bonds. So far, the Ministry of Finance has raised 1.4 billion lei.

Since the beginning of the year, the Ministry of Finance has borrowed 35.95 billion lei from the local market. This is supplemented by 2.25 billion dollars, raised through an issue of bonds on the US market. (ALEXANDRU SÂRBU)

•

Remus Borza: They may cancel the contracts, including the ones with the "clever boys", if they are causing losses

The contracts concluded by Hidroelectrica will be thoroughly reviewed, including the ones concluded with "the clever boys", and in cases where they are found to be causing the company to be losing money, they will be cancelled, Remus Borza, who owns Euro Insol, the company which was appointed as receiver, recently said.

•

Most of the loans granted by the banks to "Hidroelectrica" are guaranteed with the contracts concluded with the "clever boys".

Lawyer Arin Stănescu said that banks shouldn't have granted loans using the contracts in question as collateral. There was always a risk those contracts would be canceled, he said.

• • Short term bank loans (lines of credit) active on December 31st 2011 were:

- ING Bank, dated March 3rd, 2009, for 38 million lei. The facility takes the form of an overdraft, and can be used until March 15th, 2012.

On December 31st, 2011, the balance of the facility was 36,162,022 lei.

The loan is guaranteed through the assignment of the receivables resulting from the contract concluded with EFT Romania.

 Alpha Bank Romania, dated November 3rd 2009, for 80 million lei - the maximum amount which could be granted throughout the facility, for the types of loans agreed by the parties. The facility may be used until January 31st, 2012.

December 31st, 2011, the balance of the facility was 79,976,183 lei.

The company has agreed to have quarterly turnover through the accounts opened with the bank equal to the amount of the facility. The company also guarantees with a pledge over all the accounts of the company opened with the bank.

- BRD GSG, dated September 27th, 2009, for 300 million lei. The contract was concluded for a period of 1 year, with the option for automatic renewal for an equal term. Expiration - September 30th, 2012.

On December 31st, 2011 the balance of the facility was 299,371,849 lei.

The loan is guaranteed through an agreement for the assignment of receivables for the contracts with CEZ, EHOL, Energy Holding.

- CITIBANK Europe PLC, dated April 20th, 2012, for 46 million dollars. The facility takes the form of an overdraft, which may be used until December27th, 2012.

On December 31st, 2011, the balance of the facility amounted to 27.8 million dollars.

The loan was guaranteed with a pledge of the current accounts opened with the bank.

- RBS Bank, dated December 23rd, 2009 for 32 million Euros. The loan is available for drawdowns in lei and/or Euros. The facility takes the form of an overdraft, and may be used until August 1st, 2012.

On December 31st, 2011, the balance of the facility was 27.9 million Euros.

The loan is guaranteed through a promise to assign the receivables which the company has to recoup from Energy Financing Team AG, as well as through a pledge on the day-to-day amounts credited to the active account of the company indicated by the bank.

- LIBRA BANK, dated June 30th, 2010, for 13.5 million lei. The facility takes the form of an overdraft, available until June 30, 2012.

On December 31st, 2011, the balance was 13.18 million lei. The facility is guaranteed through the assignment of the receivables which the company has to receive from third parties accessible to the bank resulting from the contracts with FFEE Electrica Furnizare Transilvania Sud, FDEE Electrica Distribuţie Transilvania Sud and with FDFEE Electrica Furnizare Transilvania Sud, and through the pledge of all the accounts opened with Libra Bank.

- Banca Transilvania - dated October 14th, 2011, for 120,000,000 lei. The loan is available to be used in lei. The facility will be granted in the form of an overdraft, which may be used until October 13th, 2012.

The loan is guaranteed with the receivables which the company has to collect based on the contracts with Arcelor Mittal Galaţi SA and the National Salt Company.

On December 31st, 2011 the balance of the facility was 94,056,904 lei.

• • 1.5 billion de lei in long term debt

- BIRD - 110.000.000 dollars - balance on December 31st, 2011: 727,492 lei (guaranteed by the Ministry of Public Finance)

- UBS AG - 29.27 million Swiss Franks - balance on December 31st, 2011: 2.7 million lei (guaranteed by the Ministry of Public Finance)

- IBRD: 66 million Euros - balance on December 31st, 2011: 217 million lei (guaranteed by the Ministry of Public Finance)

- Citi International PLC: 75 million Euros - balance on December 31st 2011: 185 million lei (guaranteed through a promise to assign the receiva1bles against Luxten Lighting, Elsid Titu, Electromagnetica, Electrocarbon Slatina, Euro-PEC)

- ING Amsterdam Bucharest branch: 60 million Euros - balance on December 31st, 2011: 138.2 million lei (guaranteed by an agreement for the assignment of receivables with Alro Slatina, EON Moldova Furnizare, DFEE Enel Electrica Banat, FDFEE Electrica Muntenia Nord and a pledge on all the accounts opened with ING, with the exception of the one the 66 million Euros contract with the IBRD is being conducted through.

- BCR: 50 million Euros - balance on December 31st, 2011: 187.8 million lei (guaranteed through a letter of comfort from the Ministry of the Economy and a pledge on all of the accounts opened with BCR)

- Unicredit Bank Austria: 117 million Euros - balance on December 31st, 2011: 306.2 million lei (guaranteed through a letter of comfort from the Ministry of the Economy)

- EFG Eurobank Luxembourg: 30 million Euros - balance on December 31st, 2011: 89.7 million lei (guaranteed through a letter of comfort from the Ministry of the Economy)

- ING BANK Dublin branch: 60 million Euros; balance on December 31st, 2011: 184.7 million lei (guaranteed through an agreement for the assignment of the receivables against EFT România, EON Moldova Furnizare, FFEE Electrica Furnizare Muntenia Nord, FDFEE Electrica Distribuţie Muntenia Nord, FFEE Electrica Furnizare Transilvania Nord, ENEL Energie Banat, FFEE Electrica Furnizare Muntenia Nord, as well as a pledge on all the accounts opened with the bank)

- BRD - 30 million Euros, balance on December 31st, 2011: 94.5 million lei (guaranteed through a letter of comfort from the Ministry of the Economy and the pledge of the receivables against FFEE Electrica Furnizare Transilvania Nord, CEZ Distribuţie, CEZ Vânzare, ALPIQ Romenergie, Energy Holding)

- BERD- 110 million Euros, balance on December 31st 2011: 7.6 million lei, guaranteed by the Government through the Ministry of the Economy and Business Environment.

• • Clarification

Lawyer Remus Borza, who owns the company "Euro Insol" SPRL, which was appointed as a receiver in the insolvency of "Hidroelectrica", denied the fact that he was at the headquarters of "Hidroelectrica" on Monday, as head of the Audit Body of Prime Minister Victor Ponta.

The clarification comes as a result of the article "< Hidroelectrica > is insolvent" (< Hidroelectrica > este in insolvenţă"), published in June 21st, 2012 edition of the BURSA newspaper, in which sources from the company said that Mr. Remus Borza had visited "Hidroelectrica" as head of the Audit Body, which he denies.