K-towers tapes – questions left unanswered

Much uproar in the public discourse after the unveiling of recordings on which nadczłowiek* Kaczyński was talking about eventually aborted office development plans. Interpretations of what can be heard on the tapes (takes a while if you want to listen to the entire bundle of recordings, since the basic file shared by Gazeta Wyborcza has a duration of one hours and eight minutes) vary drastically. My thoughts to share are on the sidelines of the debate, since I am trying to look at the entire scheme from a banker’s perspective and discern intricacies an ordinary commentator would overlook.

1. No one has bothered to comment on how an office rental could fetch a return of 30%. I infer Kaczynski and his relatives meant ROE (return on equity = own funds invested) generated by a leveraged (financed with a third-party loan) investment. In reality rental of office space in Warsaw generates yield around 7% yearly.

2. The mythical one billion three hundred million. I have not worked out so far whether this was the amount of loan to be disbursed by Pekao S.A. or the entire construction budget. The question is valid since the Polish Finance Services watchdog a few years ago has brought into force Recommendation S, a set of strict guidelines pertaining to commercial property lending (observance of which has been strictly controlled by the regulator since then), in line with which a bank can finance up to 75% of (net-of-VAT) investment costs. Here I see only two possible outcomes:

A/ Srebrna venture has 25% equity, i.e. at least 300 million PLN, which according to my best knowledge goes well above the market value of plot of land. This gives rise to another question, namely how Srebrna had come into possession of so much money.

B/ State-controlled bank Pekao S.A. would finance 100% of the project budget and be in breach of Recommendation S, however the regulator (with Marek Chrzanowski in charge of it) would connive at it.

3. The terms of conditions of the deal were described by the press as very loose. I have not read the source article in Wyborcza (or skimped to pay for subscription), only its summary in Onet, which sadly was compiled by a journalist not up to the task. I can tell you if I recommended a loan for a start-up, for preparatory works with bullet repayment and interest capitalised rather than paid in regular intervals, I would be handed a cardboard box and fired. Since the inception of my adventure with banking industry, I have always avowed, unless pressed by unemployment, I would never, ever consider taking up a job with a state-controlled bank. And I proudly hold with it!

In recent weeks one scandal afflicting ruling party prominent politicians chases another. Seemingly PiS is teflon-coated and support in polls has not dwindled markedly. The situation resembles the course of events which kicked in the previous government out of power in 2014-2015. It all had begun with tapes whose importance had been shrugged off and then president Komorowski who had been told to have to run over a nun while inebriated behind the wheel to lose the election, actually lost it. The history may repeat, while the European parliament election in May will serve as a gauge.

* nadczłowiek = literally more than a human, the word I have coined to describe the stance of himself Jarosław Kaczyński had demonstrated over recent months.