Kazkommertsbank seeks re-entry into post-crisis Eurobond fold

October 27. The Financial Times

By Alesia Sidliarevich and Yulianna Vilkos

Kazkommertsbank seeks re-entry into post-crisis Eurobond foldKazkommertsbank (KKB) will find out this week whether foreign investors are ready to re-admit Kazakhstani banks to the Eurobond market after a crisis-ridden funding hiatus. Its fund raising plans come almost two years to the day after the government told the country’s four largest financial institutions – KKB included – that they would receive state-funded capital injections to boost their dwindling liquidity.

Top quasi-sovereign corporate borrowers from Kazakhstan such as uranium producer Kazatomprom, energy heavyweight KazMunaiGaz and railway operator KTZ all priced benchmark Eurobonds this year. Now KKB is aiming to become the first Kazakhstani bank to venture back into international capital markets since a liquidity crunch pushed several of its peers to the brink of bankruptcy last year.

“KKB’s Eurobond will be a test case for how receptive investors are to Kazakhstani names,” said Richard Luddington, vice chairman of global capital markets at UBS. The Swiss bank is working alongside JPMorgan to arrange talks with investors about Kazkommertsbank’s proposed Eurobond and on the sidelines of the Kazakhstan Business Forum in London last week, Luddington described attendances so far as “extraordinary”.

The Almaty-headquartered bank began touring Asia and Europe on 18 October and is meeting investors in the US this week. A resulting deal could be worth up to USD 750m, with a maturity as long as seven years, according to an announcement by KKB subsidiary Kazkommerts Securities on the local stock exchange last week.

Bouncing back

It will be two years ago tomorrow (28 October) that the Kazakhstani government announced it was providing four “systemically important” institutions with additional capital, following the recommendation of the country’s financial services regulator, the FMSA.

The chosen lenders – Alliance Bank, BTA Bank, Halyk Savings Bank and KKB – fared very differently in the months that followed the 2008 prime ministerial edict.

Within half a year, Alliance Bank and BTA became mired in lengthy and sometimes rancorous debt negotiations that had to be steered towards a resolution using a specially drafted restructuring law. Although the process won praise from commentators for minimizing the impact on Kazakhstani taxpayers, the USD 20bn write-offs that resulted over the last 18 months left many foreign investors reluctant to consider providing funds for Kazakhstani banks.

While KKB draws up plans to raise new money via its USD 2bn Medium Term Note (MTN) programme, BTA Bank’s creditors are waiting for a report on its severely impaired loan book. Lenders are hoping for signs of upside that will boost the value of BTA’s recovery notes, which were issued as part of the USD 16.7bn debt restructuring it only formally completed in August this year.

But the other two recipients of state support, KKB and Halyk, paid the interest on their foreign-currency obligations throughout the crisis and have since reduced their liabilities on international bond markets. Both are now viable Eurobond issuers, said two London-based fund managers looking at KKB’s proposed deal.

Forgive, forget, fund

“KKB has done the hard work of repaying its debt at par while others imposed haircuts [on foreign creditors] and now investors should give it a hand,” said one of the fund managers. In return, the bank should be prepared to offer around a 10% yield for a five- or seven-year deal, he added, echoing many other buysiders’ views on pricing.

“There are no right banks or wrong banks, just wrong prices,” suggested a London-based credit analyst, who said that although she remained sceptical about KKB’s financial strength, a deal yielding around 10% would be worth a look.

KKB has managed to more than halve its USD 12bn of debts over the last couple of years through timely repayments and judicious buybacks of its own paper, noted a Moscow-based credit analyst. The bank plans to use proceeds from its new issue to repay debt and for general banking purposes, according to KKB’s MTN prospectus, which was updated on Friday (22 August).

The bank still has a liquid Eurobond curve and its USD 200m 8.625% 2016 notes currently yield 9.2%-9.3%. A new deal would need to offer a 25bps-100bps premium depending on whether KKB attempts a five- or seven-year issue, three buysiders said.

Evidence remains of the bank’s recent travails, however. KKB’s non-performing loans amounted to 23.6% of gross loans at end-June 2010, with loan-loss provisions running at 20.3% and restructured loans at 24.4% of its USD 18.5bn gross loan book.

Nevertheless, its total capital adequacy ratio of 15% and a Tier 1 capital ratio of 12.6% were well above the regulatory minimums set by the FMSA at 10% and 5%. KKB’s management said in August that KKB would evaluate available funding options, but senior officials also stressed that the bank had sufficient liquidity to cover upcoming debt repayments of almost USD 750m in 2011.

So KKB is no longer in a critical situation but it does need liquidity, said Yelena Bakhmutova, the head Kazakhstan’s financial services regulator. “We are following [the bank] closely, [but] if it does not place the bond it will still be able to make payments,” she said, adding that she was confident KKB would successfully execute its Eurobond plans.