[Kazakhstan’s Banking Sector] #1 Alliance Bank

Fueled by cheap international capital, a consumer boom and surging oil prices, Kazakhstan’s banks had been developing rapidly prior to the onset of the credit crisis.  By early 2009, however, the government was forced to bail out a sector saddled with over $50 billion in foreign debt, with President Nursultan Nazarbayev ordering the country’s sovereign wealth fund, Samruk-Kazyna, to step in to prevent a collapse.

In this series we look at how each of the major banks in Kazakhstan has been dealing with the effects of the crisis.

Alliance Bank, among the five top Kazakh banks in terms of both asset and equity size, had focused primarily on retail banking and SME lending.  It was one of the first of the country’s banks to be taken over by Samruk-Kazyna earlier this year.

One of three Kazakh banks with London listings, Alliance Bank raised $704 million in an IPO on the LSE in 2007, with a market capitalization of over $4 billion. In February 2009 Samruk-Kazyna became the bank’s majority shareholder, and by April 2009 it had defaulted on its debt, trading in its stock had been suspended, and its shares, which had been priced at IPO at $14.00, were worth only $0.09.

At present, Alliance has a total of $4.2 billion in debt that must be restructured. At the end of May Kazakh Finance Minister Bolat Zhamishev told Interfax Kazakhstan that Samruk-Kazyna intended to complete restructuring process in the summer of 2009. In the first week of June, the Bank announced the terms for the restructuring.  According to Silk Road Intelligencer, the plan offers the bank’s creditors three options to recoup some or all of their investment:

• Buyback at 20% of face value, limited to $500 million
• Seven-year rollover with a 50% discount
• 15-year rollover at par

In response to the restructuring plan, Standard & Poor’s lowered its short- and long-term counterparty credit ratings on Alliance Bank to D/D (default) from SD/SD (selective default), considering the plan to be “a distressed exchange offer.”

Alliance Bank’s CEO Maksat Kabeshev said that the bank plans to keep servicing the interest on its debt and stressed that an early agreement on restructuring is vital for the bank’s survival.  Mid-July seems to be the key deadline.

“If by July 15 Alliance Bank has not reached a satisfactory agreement [with creditors], the Financial Supervision Agency will move Alliance into conservation,” Kabeshev said, referring to a regulatory regime that may be followed by bankruptcy.

Thus, Alliance’s future remains uncertain, and it is still unclear whether the government is prepared to go further to save it, should the current restructuring plan fail.

UPDATE 9 JULY: Alliance has finalized its restructuring plan, offering creditors five options ranging from immediate redemption at a deep discount to conversion to equity.  See Silk Road Intelligencer for further details on the options.

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