The district administrations of Prague 6, 10 and 13 still have a total of more than Kč 650 million tied up in the investment firm Key Investments which they are attempting to get back. However, instead of coordinating their efforts to redeem their money, the leadership of each administration has chosen a different tactic. It remains to be seen which, if any, will be more successful.
It appears that in recent weeks top representatives of the center-right Civic Democrats (ODS) in Prague — such as the former mayor of Prague 6 and freshly appointed Minister of Environment Tomáš Chalupa, Prague 13 mayor David Vodrážka, and Prague 10 mayor Milan Richter — have paid little attention to anything other than the situation with Key Investments. But they have no one to blame but themselves.
But there’s not much time; if a generous investor such as PPF Group or J&T doesn’t emerge and strike a some kind of deal with Key Investments, there is little hope that the administrations will see the return of the public funds they entrusted to the investment firm.
An execution order on part of Key Investments’ assets has been issued by a court in favor of the company ENIC – the genuine owner of Slavia Prague football club. The investment firm is also under police investigation following criminal complaints by the coal mining company Sokolovská uhelná and member of the Prague 13 assembly Libor Jirků (TOP 09). Key Investments also faces a lawsuit in the arbitration of the Prague Stock Exchange, and is also under investigation — albeit suspiciously protracted — by the financial market regulator the Czech National Bank (ČNB)
Prague 6: impede and don’t communicate
Prague 6 — the district that entrusted the most money to Key Investments — has opted for the worst tactic. On Feb. 22, the district’s council asked the brokerage to return Kč 252 million in funds that ultimately belong to the Prague 6 residents. So far, the administration hasn’t received a crown back. Prague 6’s policy appears to be not to provide precise information, hold back and hope that ‘somehow it will work out fine.’
So what’s Prague 6 Council’s tactic? From the information available, it appears that they don’t have much of one. Maybe to some extent this estimation is the result of the ODS-dominated council’s arrogant approach to the media and opposition members of the district’s assembly. Prague 6’s policy appears to be not to provide precise information, hold back and hope that “somehow it will work out fine.”
The new Prague 6 mayor, Marie Kousalíková (ODS) — although she probably played no part in the transfer of funds to Key Investments — has mostly answered our questions a full two weeks after receiving them (according to Czech law, public organs are obliged to respond to media enquiries within two weeks). And she simply did not answer a number of questions.
Czech Position asked Kousalíková about the level of internal rate of return (IRR) from the financial investments made by Key Investments on behalf of Prague 6 since the first transfer of funds to the investment firm until the end of 2010. Each portfolio manager provides this information to clients automatically, therefore we presumed that the mayor would not have a problem with sending us this information.
We suggested to Kousalíková that if it was complicated for her administration to compile these figures, she could send us all the reports on changes to the portfolio and that we would calculate the IRR on behalf of Prague 6. And her response? None whatsoever!
Czech Position assumed the mayor would respond in one of four ways to our enquiry regarding the IRR:
a) That she would be annoyed and wouldn’t say anything. This, we presumed to be most likely and thus it transpired;
b) That she would ask what IRR is;
c) That she would pass the enquiry to Tomáš Chalupa, as he was mayor when all the funds were transferred to Key Investments;
d) She would send the information requested.
Given the inadequate and obstructive responses from the civil servants of Prague 6, we will attempt to obtain this information from the district administration on the basis of provisions of the law on access to information, but this will be a lengthy process.
Although Kousalíková did respond to other questions, her answers were inadequate. In response to the question as to whoevaluated Prague 6’s investment portfolio managed by Key Investments, when they did so, and what was the result, she responded “the fund manager, always every month.” In other words, only Key Investments.
Since 2003, when Prague 6’s financial adventure with Key Investments began, it apparently never occurred to Chalupa, the former mayor, to assign an independent asset manager to inspect the administration’s portfolio and assess its actual market value. This suggests that Chalupa is not exactly the most fastidious bookkeeper.
Will the money come in 2013 and 2024?
To finance the business of chemical producer Via Chem Group and the construction of Slavia Prague’s new stadium in Prague 10 by E Side Properties with Prague 6 money may well have been advantageous for certain high-ranking politicians in Prague 6 town hall, but it is certainly not to the liking of many the district’s residents. For years they knew nothing about it — but they do now, and members of the opposition in the Prague 6 assembly are sharply criticizing the district’s leadership.
“This was clearly a gamble that goes against all the principles of proper administration of public funds and all principles of conservative management of assets,” Ivan Mašek (TOP 09), a representative in the Prague 6 assembly, told Czech Position. At least since 2005, the ODS politicians in the town hall’s leadership basically lent citizens’ money to the indebted companies of their dubious business ‘friends.’ At the very least, Chalupa and first deputy mayor, Jiří Fárek, have some explaining to do. ‘Key Investments has repeatedly, and over a considerable length of time, violated the contracts signed.’
“The fact that now the council leadership is still being evasive and not answering questions posed by the opposition or journalists, and likewise the lame and insufficient legal steps taken, indicates that Key Investments has repeatedly over a considerable length of time violated the contracts signed,” Mašek said.
“It also indicates that the relationship [between the Prague 6 leadership and Key Investments] is totally non-standard. It’s as if they had thrown the money into fruit machines which belong to their friends and then excused themselves on the basis that the machines were properly registered,” he said.
The E Side Property debt bonds with a nominative value of Kč 50 million mature in 2024 — and with hopelessly low obligatory credit payment of 2.75 percent. Their actual value is but a small fraction of the nominative value. Will Prague 6 wait until they mature in 2024?
Debt bonds issued by the leasing firm Sincom, which are not traded on any market, were bought for Kč 24 million by Key Investments for Prague 6’s portfolio. Again, the market value of these bonds is minimal. Debt bonds issued by Via Chem Group represent the largest amount of assets in Prague 6’s portfolio with a nominative value of Kč 153 million.
The company’s performance has improved markedly since the following the depths of the economic crisis, yet these bonds don’t mature until October 2013. What if Prague 6 requires this money beforehand? Will Mayor Kousalíková wait until then?
The last asset in the portfolio are shares in the company Spolku chemické a hutní výroby (Spolchemie), which were purchased for Kč 26 million. Spolchemie is part of the Via Chem Group. Although the company posted a profit for 2010, the shares are altogether non-liquid and the firl last paid a dividend in 2007.
Prague 10 Mayor needs another month
Prague 10 mayor Milan Richter (ODS), unlike his counterpar in Prague 6, has demonstrated some degree of expertise, more accurately cunningness, in the Key Investments case. On March 29, he called an extraordinary meeting of the Prague 10 Council that was also attended by the leaders of the opposition parties in the district’s assembly.
Richter told the council that he had extended by one month (until the end of April) the contract with the firm Equita Consulting, which has been employed to make and independent assessment of the market value of the securities which Key Investment bought with Kč 200 million of Prague 10’s money.
According to the original contract, Equita Consulting had one month — until the end of March — to make the evaluation, but the assignment was apparently too complicated to fulfill within four weeks and requires another month. Does such a reputed company as Equita Consulting need two whole months just to evaluate four obscure security titles? We find this hard to believe — it took our colleague Tomáš Hlaváč just three days to complete the same task on his own! Thus this appears to be a delaying tactic by the leadership of Prague 10. It’s obvious that Equita Consulting doesn’t need another month, but it’s quite likely that some financial group does ...
Richter is most probably hoping that before the end of April an investor will emerge who will sort out the problems with Key investments in its own manner and pay back Prague 10’s money. It’s obvious that Equita Consulting doesn’t need another month, but it’s quite likely that some financial group does in order to reach an agreement with Key Investments on the technicalities of resolving the problem.
The composition of Prague 10’s portfolio is similar to that of Prague 6. At least in terms of nominative value, more than 53 percent is comprised of debt bonds of E Side Property (the owner of Slavia Prague FC’s stadium. The potential investor-savior of Key Investments could receive a share of the ownership of the new stadium through these bonds. Nevertheless, the construction company Hochtief, Česká spořitelna bank and the Financial Office hold partial ownership rights to the stadium as collateral to the tune of Kč 1.1 billion.
More than 44 percent of Prague 10’s portfolio is made up of Via Chem Group bonds. As with Prague 10, there is hope the firm will pay its obligations, though not before October 2013. The remaining securities are a small quantity of Sincom’s debt bonds (less than 1 percent) and shares in Spolchemie (1.5 percent) which together have a negligible value.
According to Czech Position’s sources, the Prague 10 leadership is convinced that their portfolio is worth Kč 240 million and it is Equita Consulting’s task to confirm this “qualified” estimate.
Vodrážka hires Tomáš Sokol
The most dramatic developments have been in Prague 13, which entrusted Key Investments with Kč 200 million upon the recommendation of Prague 6’s administrative leaders. Again the portfolio is similar: E Side Property debt bonds for Kč 16 million (8 percent of the nominative value of the portfolio), Via Chem Group bonds, which mature in October 2013, for Kč 180 million (86 percent), and the remainder — more Via Chem Group debt bonds.
It should be pointed out that — unlike his ODS colleagues in Prague 6 and 10 — Prague 13 Mayor David Vodrážka (ODS) appears most aware of the gravity of the situation. He is also the only one who has provided timely and meaningful responses to Czech Position’s enquiries.
However, Vodrážka also faces more irate and militant opposition than Kousalíková or Richter. Assembly representative Libor Jirků (TOP 09) has filed a criminal complaint with the public prosecutor regarding the Key Investments case. He says there is a distinct danger that Prague 13 will lose its money tied up in Key Investments.
As reported by Czech Position, over a month ago Vodrážka demanded that Key Investments return all of Prague 13’s money. However, according to Libor Jirků’s criminal complaint, none of the money has been returned and the Prague 13 mayor had no choice other than to hire reputed lawyers.
Vodrážka has confirmed to Czech position that the law firm Brož & Sokol & Novák is representing Prague 13 in the Key Investments case. It’s not a bad choice even if Key Investments’ team would pay more attention if he had hired Weil, Gotshal & Manges for example.
Worthless favorable ruling?
Nevertheless, it remains to be seen whether Prague 13 will achieve anything through its actions. If an investor, such as Petr Kellner’s PPF Group for example, does not appear, and even if an eventual court ruling goes in favor of Vodrážka and Prague 13 it will be more or less meaningless.
A considerable amount will be paid to the law firm, which in one, two, or may be three years will secure a piece of paper that he will be able to show the administrators — who will dismiss it as worthless. On the other hand, if he did not hire a law firm, the opposition would accuse him of neglecting the case.
What is more, this coming Wednesday (April 6) Vodrážka will face sharp criticism at an extraordinary meeting of the Prague 13 assembly which has been called by the opposition to discuss the situation with the hundreds of millions tied up in Key Investments.
All previous articles about Key Investments are archived here
