Kazakhstan: Restructuring may reveal emperor’s new clothes


Guy Norton
Published on:

Bad debts rise to new highs; Investors tire of mounting problems

The restructuring of almost $20 billion of foreign debt by two of the leading Kazakh banks in the coming months is likely to prove a key driver of sentiment towards the central Asian state’s embattled financial sector. "The debt restructuring process in Kazakhstan has been going on since March now and we have had months of uncertainty as a result," says Milena Ivanova-Venturini, head of banking research at Renaissance Capital in Almaty. She adds that with Kazakh banks having long been touted as the best-regulated and best-managed banks in the Commonwealth of Independent States the mounting financial problems facing the sector have engendered a growing sense of investor fatigue. "In terms of the banks, Kazakhstan is not really on people’s radar screens any more," she says. "There’s a sense of ‘The emperor’s new clothes’ about the sector."

Challenging future

non-performing loans in the banking sector

As the latest data illustrate, banks in Kazakhstan face an extremely challenging future, with bad debts approaching alarming levels after nearly a decade of breakneck lending, funded principally by foreign borrowing. According to figures from the country’s financial services regulator, AFN, sector-wide non-performing loans reached 30.8% in June. Those grim statistics were heavily skewed, however, by the results at the number-one and number-four institutions, BTA Bank and Alliance Bank, both of which are restructuring their overseas borrowings, and where NPL ratios were about 65%.

In late July BTA Bank announced estimated losses and write-downs of $7.9 billion for 2008, and admitted that further write-downs were likely this year. The losses left BTA with negative equity of KT743 billion ($4.9 billion), which the bank blamed on the conduct of the previous management. BTA said in a statement: "Certain loan documentation, including collateral and associated additional agreements, primarily relating to financing of projects outside Kazakhstan, is no longer available. In addition, many loans were transferred to new borrowers that do not have adequate sources of repayment. Moreover, no collateral was provided by these new borrowers. Consequently all transferred loans are unsecured."

Impairment charge

Although BTA emphasized that it is seeking recovery of these loans, the transactions’ lack of transparency meant it had to record an impairment charge of KT1.09 trillion against them. The bank is also seeking to restructure almost $15 billion of foreign borrowings, with a combination of cash buyback, rollover and debt-to-equity conversion options set to be put in front of creditors in August. BTA had originally hired Goldman Sachs to advise it on its debt restructuring but the two banks parted ways in July in an apparent dispute over fee levels. BTA has since hired Lazard Frères to advise it.

Lazard is also advising Alliance Bank, which has already signed a non-binding agreement with its creditors concerning its $4.2 billion of foreign obligations. As a result it secured an agreement with Kazakhstan’s National Welfare Fund, Samruk-Kazyna, for an $856 million capital injection.