Central Asia: Second BTA default shakes Kazakh banking sector

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Support sought from Samruk-Kazyna; Upheaval after Kulibayev sacking

Kazakhstan’s third-biggest lender, BTA, formally defaulted on its debt for the second time last month, derailing what was the biggest-ever emerging market corporate debt restructuring.

A grace period ended on January 18 after the bank missed a $160 million interest payment on its $2 billion Eurobond due 2018. The default comes just 18 months after creditors signed up to an initial restructuring, with a 70% haircut on $16.6 billion in debt after its first default, in 2009.

BTA has so far failed to win up-front shareholder approval for another restructuring: holders of the bank’s global depositary receipts voted against such a resolution in Almaty on January 26. But BTA, whose chief executive, Marat Zairov, resigned last month, says it is still pursuing a restructuring.

As Euromoney went to press the bank was setting up a formal steering committee, advised by Lazard and law firm White & Case.

The new default is a harsh blow for creditors. In a press release on January 12 an ad hoc creditors’ group said that the National Bank of Kazakhstan and the $90 billion sovereign wealth fund Samruk-Kazyna were both responsible for what the group called an inexcusable situation.

“Creditors who have relied on BTA’s financial statements and the regulatory data are shocked by the apparent misstatements in these accounts and by the rapid negative turnaround in BTA’s reported financial condition,” the release said.

The damage to Kazakhstan’s perceived creditworthiness comes at a difficult time for the country. Non-performing loans in the banking sector rose to a record 37% of total loans last year. Wholesale funding, mostly from international sources, made up one-third of total Kazakh bank liabilities in September, according to Moody’s.

“Higher funding costs and a lack of access to international markets [as a result of BTA’s default] will exacerbate these banks’ already challenged profitability and funding,” Moody’s said.

Meanwhile, bankers say the political fallout from a seven-month strike in the oil-rich Kazakh west has muddied access to key decision-makers. In October president Nursultan Nazarbayev replaced Kairgeldy Kabyldin, the head of the national energy firm, Kazmunaigas. At the end of December Nazarbayev then replaced the chairman of Samruk-Kazyna, Timur Kulibayev, his brother-in-law, who was previously thought to be his likely successor.

Until late last year, when BTA announced that its negative equity could reach $5.1 billion by the end of 2012, many still believed the worst was over for the bank. BTA gave repeated assurances that it had sufficient liquidity, even when rumours began to circulate in May that its loan book might not be as clean as previously thought.

The 81.5% ownership taken by Samruk-Kazyna as part of the restructuring was one source of comfort. According to a statement from BTA in October, Kulibayev had said that Samruk-Kazyna was ready to provide more aid if the bank needed financing. In the same statement, dated October 5, BTA’s deputy chief executive was quoted as saying that the bank had enough liquidity to service its debt for at least a year.

Samruk-Kazyna injected some $6 billion in equity into the bank in 2009 and 2010. But creditors are frustrated that it did not do more to prevent a default this time: either via a equity injection or by countering BTA’s loss-making net interest margins.

Euromoney understands that BTA is negotiating to lower the cost of the short-term funding it gets from Samruk-Kazyna and the National Bank of Kazakhstan. A spokesperson for BTA tells Euromoney that a steep deterioration in BTA’s net interest margin is part of the reason for the new default. The spokesperson highlights “the high cost of funding and fierce competition among Kazakh banks for attractive clients” in 2011.

But the other reason for the new default, says the spokesperson, is that recovery of impaired loans and other assets has taken longer than expected, partly thanks to protracted legal proceedings in the UK. BTA is trying to recover billions of dollars of assets allegedly appropriated by its former chairman, Mukhtar Ablyazov, through courts in London, where Ablyazov now lives.

Ablyazov denies the charges and says they are politically motivated. In an open letter to Nazarbayev, Ablyazov said the bank’s management since his departure is responsible for the new default. He said he was ready to reassume management of the bank.

BTA RESTRUCTURING – what happens next?
Estimates, according to equity shortfall
 No Samruk-Kazyna/state supportSamruk-Kazyna/state covers 50%
Equity shortfall, $bln 54.5454.54
Haircut on senior debt claims* 93%88%82%66%63%60%
Recovery value7%13%18%35%38%41%
*Assumes recovery notes treated as senior debt (subject to same haircut) and subordinated debt recoveries close to zero (compensation in bank equity)
Source: Barclays Capital