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Why agroholdings go bankrupt. The case of Mriya

23 November 2018

Even if financial problems among large farming corporations are less frequent than those among smaller farms, they attract much more public attention due to the negative externalities they may cause. Alibi and KazExportAstyk in Kazakhstan, Belaya Ptitsa and Evrodon in Russia, Sintal Agriculture and Agroton in Ukraine, Pili in Uruguay, Clealco in Brazil, SanCor in Argentina, KTG Agrar in Germany, Doux in France – all of these large agricultural companies were reported to have been confronted with difficulties of fulfilling their financial obligations in recent years. The reasons behind financial crises, as well as the approaches to overcome them, may vary from company to company and from country to country. However, our insights gained from the analyses of financial crises in big agricultural companies suggest that these companies have much in common with each other. The present article scrutinizes the causes and consequences of the corporate default of a well-known Ukrainian agroholding Mriya.

Mriya’s rise to prominence

A vertically integrated agroholding Mriya was founded by Ivan Huta and his wife Klavdiya in 1992 and was managed by them until their oldest son Mykola assumed charge of the business in 2008. From operating just 50 hectares of farmland in a small village in the Ternopil region of Ukraine at the dawn of its activity, Mriya expanded to operate 320,000 hectares in six regions of Western Ukraine in 2014. In 2008, the company made an initial public offering (IPO) of its shares on the Frankfurt Stock Exchange (FSE) that helped it to raise about $ 90 million of additional capital. With 20 % of shares in free float, Mriya’s total capitalization reached $ 1.1 billion at its peak in 2010. In 2010-2013, Mriya was on loans from the World Bank Group’s International Finance Corporation ($ 175 million) and European Bank for Reconstruction and Development ($ 24 million) to finance its working capital. The company used to export its products to more than 20 countries at that time.

Getting into trouble

In August 2014, Mriya suddenly reported of the inability to pay about $ 9 million of interest and settle about $ 120 million of debts. The total amount of debt, including the guarantees provided to the companies affiliated with the Huta family, amounted to $ 1.3 billion. Then, Mriya was delisted from the FSE.

Causes of trouble

In an attempt to explain the reasons for the default, the former top management of Mriya officially referred to the difficult economic situation in Ukraine, rising production costs, low sales prices and the difficulty of raising additional capital under such circumstances. Among other things, the company mentioned military operations in the Donbas as a factor that contributed to the crisis although the activity of the armed forces took place about 950 kilometers away from the company’s production facilities.

These explanations raised a fair amount of scepticism among the experts and analysts who unanimously claimed the major reason of Mriya’s downfall was its top management’s fraud. According to Marian Zablotsky, analyst of the Ukrainian Agrarian Association, Mriya is an example of how a fully legal business can be established with a purpose of borrowing funds that will never be paid back. In January 2015, the name of Mykola Huta was placed on the Interpol’s list while the Ministry of Interior of Ukraine sought him for defrauding of over $ 100 million. To avoid prosecution, Mykola Huta allegedly fled to Switzerland. The Huta family was accused of defrauding of more than $ 200 million in total.

With this sort of misconduct, it is no surprise that Mriya experienced the problems of mismanagement in other aspects of its operations. Among other things, there was a problem of bad quality of the leased land. One of the reasons why Mriya had been leasing increasingly more land was an endeavour to convince the outside investors of the company’s trustworthiness and prosperity. Predictably, poor soils had resulted in poor productivity but this had little, if any, reflection in Mriya’s corporate reports. The company had been allegedly falsifying some of its production and financial results.

Getting out of trouble

Despite a huge amount of debt, Mriya’s major creditors from the EU and the USA decided to place the company under restructuring. They took over control over the company’s assets and appointed a new crisis management team. Mr. Simon Chernyavsky was appointed a new CEO and leader of the crisis management team in February 2015. He had previously served as Production Director at Black Earth Farming in Russia and CEO of two Ukrainian agroholdings, HarvEast and RoAgro. His anti-crisis program was approved by Mriya’s creditors’ committee, and he started optimizing  the company’s businesses according to the program. However, initially, it was a hard game to play. The real land use figures were significantly below 260,000 hectares that were declared by the former top management during the transfer of control over the company to the creditors. Of 210,000 hectares that actually remained, only 160,000 could be put into operation due to the lack of finance. Nevertheless, Mr. Cherniavsky and the new management team he put together did not give up and decided to streamline the company’s business processes. They reduced the number of Mriya’s production clusters from 17 to 7, sold the company’s sugar plants and made cash crop production a major business. The company reportedly completed the process of debt restructuring in August 2018, thus reducing the total debt load from $ 1.1 billion to $ 309.5 million. In September 2018, Mriya was acquired by the Saudi Agricultural and Livestock Investment Company (SALIC) that already manages about 45,000 hectares of farmland in Ukraine, neighboring the farms operated by Mriya. According to Financial Times, SALIC paid $ 242 million to acquire Mriya.

Lessons learned

The financial literature divides the causes of crisis into exogenous and endogenous. The exogenous, or external, causes originate from disruptive effects of a firm’s environment and include market fluctuations, wars, political reforms, bad weather conditions and other events external to the firm. The endogenous, or internal, causes arise from inside of the company and may include inefficient management practices, incompetence of managerial staff or wrong operational or strategic decisions. Mriya’s problems seem to have arisen mainly due to endogenous factors although the former top management of the company tried to find an excuse by referring to unfavorable external effects. In fact, it is usually such top management’s misconduct, poor corporate governance as well as inadequate protection of property rights at the country level that altogether create unattractive business environment. Although still subject to judicial proceedings, the fraudulent behaviour of Mriya’s ‘all-in-one’ beneficial owner and CEO had obviously led to financial losses of the investors as well as to reputational losses of the industry and of the country as a whole.The only thing that is positive about this story is that Mriya’s bailout did not involve taxpayers’ money. Due to quick response from the company’s creditors, who appointed a responsible and competent crisis management team, Mriya was able to overcome the crisis.