BTA-Ablyazov: hollowing out the pyramid, filling up the carousel

One more 40 million Sterling appears to have been drained from the funds Kazakhstan’s one-time leading and now ailing bank BTA hopes to recover from its previous management. On British territory, at least 3 billion pounds are believed to remain hidden on bank accounts traces of which all lead to Mukhtar Ablyazov, now in hiding on an unknown location while condemned to 22 months in prison in the UK for perjury. Through a proxy scheme, Ablyazov appears to have “borrowed” the ?40 million from firms under his final control – meaning that the cash for his “expenses” in reality goes at the expense of BTA, now the property of Kazakhstan’s taxpayers. The latest court ruling downtown London shows that there is little that can be done against it on the legal front. But the damage goes further than that: back in Kazakhstan, the entire banking sector is threatened with the side-effects of the affair as long as it keeps dragging on like this.

BY CHARLES VAN DER LEEUW, KZW SENIOR CONTRIBUTOR

BTA-Ablyazov: hollowing out the pyramid, filling up the carouselThe new British ruling published on July 4 is the result of hearings that took place in early April – without explanations for the delay. The case concerns four “loans” granted to Ablyazov in the course of BTA’s legal battle, as he claims to cover his defence costs. In turn, the lending companies had borrowed the money themselves from yet a number of other firms under Ablyazov’s control. “These companies were Sunstone Ventures Ltd, which loaned Wintop € 500,000 on 7th July 2009; Venizon Holdings Ltd, which made 4 loans totalling over $ 27,000,000 between August and November 2009; and Zalou Investments Ltd, which loaned Wintop $ 500,000 on 4th November 2009,” a court document related to the investigation was to read. “Stephenson Harwood, Mr Ablyazov’s own solicitors have accepted that Mr Ablyazov has essentially guaranteed the debts of Zalou:” According to various reports, all loans were allocated without any collateral or other security.

In the latest ruling, curiously, there is no mentioning of the origin of the loans. “Mr Ablyazov is a party to four loan agreements (“the Loan Agreements”) between Wintop Services Limited (“Wintop”) and/or Fitcherly Holdings Limited (“Fitcherly”) as Lenders,” the ruling reads. “The amounts derived from these loans (? 40 million in all) have been used to fund the enormous legal expenses of Mr Ablyazov and others and living expenses. The Bank contends that the Loan Agreements are shams. In my judgment of 26 October 2011 said that there was good reason to suppose that these companies were ultimately owned by Mr Ablyazov. If, however, the Loan Agreements are valid agreements, the Bank contends, and seeks a declaration, that Mr Ablyazov’s rights under them are assets of his for the purposes of the freezing order and that any drawings under the Loan Agreements could only lawfully be made pursuant to paragraph 9 of the freezing order, subject to any further order that the court might make. For the purposes of this judgment I assume, without deciding, that the Loan Agreements were not shams or made with companies ultimately owned by Mr Ablyazov. […] The point at issue was raised at the hearing of an application, issued by the Bank on 13 May 2011, for the disclosure of the ultimate beneficial owners (“UBOs”) of Wintop, Fitcherly and a further funder, Green Life International SA (“Green Life”). Prior to the hearing of that application the UBOs of Wintop and Fitcherly became known by other means and the application proceeded in relation to Green Life only.”

The July 4 ruling itself is unrelated to the perjury (contempt of court in British legal terminology) case, against which court hearings have been concluded but the result of which still remains to be made public. The case concerning the “loans” goes back to the autumn of last year, following a series of cross examinations related to whether or not Ablyazov’s “expenses” came down to a circumvention of the asset freezing order he was subject to or not. “In the course of his cross examination Mr Ablyazov said that he had made an agreement with a third party called Wintop Services Ltd to borrow money for his legal expenses,” the October 26, 2011, session’s report reads. “He said that Wintop was owned by a citizen of Kazakhstan who had family, brothers and sisters there and who was a friend of his. He said that he himself had no interest in Wintop. On 18th March 2011 Stephenson Harwood, Mr Ablyazov’s then solicitors, wrote to Hogan Lovells, the Bank’s solicitors, to tell them that a company called Fitcherly Holdings Ltd was now funding Mr Ablyazov’s defence. The funds provided by these two companies have not only been used to fund Mr Ablyazov’s defence but some of his co-defendants as well. The number of lawyers so paid is large (over 10 leading counsel, more than 20 juniors and 75 other lawyers from at least 8 different firms) and the amount paid runs into millions of pounds.”

The court in its paper referred to the mysterious “friend” as Mr. X. The firm names of Wintop and Fitcherly also appeared on record for the first time. As things look, though, there was a lot more to Mr. X than the initial impression tended to suggest. Following a court case against Ablyazov’s brother-in-law, Syrym Shalabayev, who used to be the banker’s most important man of confidence since his flight to London, in which he was convicted to a jail term for contempt of court by having lied about the assets to be declared along with the freezing order, two replacements were to be signaled. Mr. X appeared to be located downtown London, which made him a likely candidate for Shalabayev’s replacement. “In late 2010 and early 2011 the Bank obtained a very substantial amount of documentation from search orders executed in this jurisdiction and abroad and from Norwich Pharmacal orders made against email service providers,” the court’s October 26 report read further. “That enabled it to secure, in the first half of 2011, extensions to the Receivership Order covering shares in 636 companies. In 2009 and 2010, Mr. Ablyazov had claimed that the vast majority of his assets were ultimately held for him by a [….] businessman named [Mr X] pursuant to declarations of trust, and that it was [Mr X] who administered the chains of offshore companies through which assets of real value were held. The information obtained pursuant to the search orders disclosed that the companies were administered by Mr. Ablyazov’s brother-in-law, Syrym Shalabayev who had until recently been working alongside Mr Ablyazov in London. […] Mr Ablyazov [has] accepted that Mr Shalabayev worked for him together with Mr X providing asset management services.”

At the time, the court referred to a certain “Mr P”, “…who is said now to be the beneficial owner of Wintop and Fitcherly is said to have hired solicitors in the UK and to have hired lawyers in Cyprus in order to prove that those two companies should not be included in the Receivership,” in the report’s words. Green Life International SA, registered in Belize, and owned by “a businessman from the former

Soviet Union who did not want his identity to be revealed.” It was, though, in the July 4 ruling, which pointed at a certain “Mr Povny” as the man behind the lending firms. “The loans were essentially personal loans made, according to Mr Ablyazov, by Mr Shalabayev and Mr Povny (the individuals behind the Lenders) because of a relationship of friendship and mutual trust for the purpose of funding legal and living expenses. In the case of Mr Povny he had the incentive of possible future business dealings with Mr Ablyazov. They were not entered into by the Lenders as an ordinary commercial transaction and the Lenders would have no interest in a third party taking up the loans.”

In his considerations, Judge Chistopher Clarke gave a setback to BTA, stating: “Rights to borrow are not assets for the purposes of a freezing order. In ordinary parlance and understanding the type of asset whose disposal is restricted by a freezing order is an asset which can be seized by the clamant, if and when he becomes judgment creditor, and which can be sensibly treated as having some value to him. If so, the value can be taken into account for the purposes of determining whether there has been a breach of the monetary limits of the order or whether they are of a size which requires to be disclosed under any order for disclosure of assets above a certain value. A person made subject to a freezing order would not ordinarily expect that a right to borrow more, and, thus increase his indebtedness, was an asset that the order sought to restrain.” The judgment consequently given was formulated as follows: “In the result I conclude that Mr Ablyazov’s rights under the Loan Agreements were not assets within the meaning of the freezing order; nor was his exercise of his rights a disposal of or dealing therewith. A right to borrow on the terms of the Loan Agreements is not the sort of asset which the freezing order contemplates. Mr Ablyazov’s rights under the Loan Agreements were of no value to the Bank. The loans, if not shams, were personal loans made by trusted friends or associates. They were incapable of assignment without the Lenders’ consent and the rights to draw down could be withdrawn. There was no realistic prospect of the Bank securing the right to borrow on these terms by execution.”

From the eastern front, meanwhile, the news concerning and related to BTA’s continuing ordeal remains bleak. Once more, the entire Ablyazov affair threatens to drag the entire sector back into a major setback. On June 18, 2012, the International Monetary Fund in an overall economic assessment of Kazakhstan noted that “provisioning of overdue loans is still relatively high” – referring to the persisting high amounts owed by banks to their foreign peers. “Domestic banks’ burden of nonperforming loans has further increased, and BTA bank has embarked on a second debt restructuring with external creditors,” the note read. “So far, economic growth and government ad-hoc support to distressed borrowers in the construction, real estate and small and medium enterprise sectors have not improved the quality of the loan portfolio, as activity in construction and real estate, the sectors subject to highest bank exposure, remains flat,” adding further down: “To mitigate further risks, a quick and definitive solution to the difficulties of BTA bank is a crucial priority.” Fears exist that BTA’s overall exposure is set to amount to 6 billion dollar by the end of the current year.

Excluding BTA which has so far failed to publish its annual report over 2011, Kazakhstan’s seven leading banks have shown poor results into the current year, according to (incomplete) data published by the Almaty Stock Exchange (KASE). Both ATF, fully owned by Italy’s Unicredit, and partly bailed-out but still defaulting Alliance Bank posted losses in the order of $8 million in the first quarter of 2012. Figures on BTA fail since the now state-run bank has not even published its annual report over 2011 so far. The remaining four reported profits close to the equivalent of $20 million over the first three months of this year. And there is worse where it comes to exposure. Loans overdue by more than 90 days at Kazakhstan’s 38 banks reached 3.43 trillion tenge ($23 billion) as of June 1, or 31.7 per cent of the total, led by BTA with 1.6 trillion tenge, Bloomberg reported recently, quoting data from the National Bank of Kazakhstan. As of early June, “unattended” loans from Kazakh banks (excluding the National Bank) made up for just below 30 per cent of their overall loan portfolio, figures by the National Bank read – up from 21.76 per cent as of end-2011. Through the period, that portfolio remained flat at just below 10.8 trillion tenge (5.2 billion euro or 6.8 billion US dollar) with provisions coming close to 3.9 trillion tenge. That amount covers close to 79 per cent of those outstanding loans qualified as “lost” in the National Bank’s terminology.

The latest move by the National Bank has been to allow banks to keep their bad debts out of the accounts on condition that profits are being converted into investments. However, reactions to the initiative tend to be cautious, or even negative. “Capital levels at many banks are overstated because insufficient reserves have been set aside to cover bad debts,” Bloomberg in a separate report quoted Moody’s as stating in a sector assessment dated June 22. According to KASE’s figures, as of April 1 this year Kazakhstan’s seven largest banks excluding wild card BTA had authorized capital amounting to 666 billion tenge, with equity in the order of 1 trillion tenge, against assets valued at around 6 trillion tenge. “Credit growth won’t exceed 4 percent in real terms this year, Bloomberg in its report quoted Moody’s as warning. “The central bank did not immediately reply to an e-mailed request for response. […] With reserves of 32 percent of gross loans in 2011, Kazakh banks will probably have to write off most of their problem loans. Creating sufficient loan-loss provisions would trim the banking industry’s capital adequacy ratio to about 8 percent from 14.2 percent at end-2011, below the 12 percent regulatory minimum.”

KEY FIGURES OF KAZAKHSTAN’S 7 LARGEST BANKS OVER 2011 AND INTO 2012

ATF

Indicator As of 04/01/12 As of 01/01/12
Authorized capital 152,878,422 th. KZT 152,878,422 th. KZT
Equity capital 66,525,478 th. KZT 67,868,561 th. KZT
Total assets 1,021,337,796 th. KZT 1,011,149,472 th. KZT
Net income -1,269,739 th. KZT -8,948,680 th. KZT
Book value of common share 1,496.00 KZT 1,526.00 KZT
Alliance Bank
Indicator As of 04/01/12 As of 01/01/12
Authorized capital 273,090,490 th. KZT 273,090 mln. KZT
Equity capital 2,784,025 th. KZT 1,032 mln. KZT
Total assets 536,421,211 th. KZT 529,888 mln. KZT
Net income -1,221,620 th. KZT 39,887 mln. KZT
Book value of common share 108.74 KZT -23.24 KZT
Book value of preferred share 779.50 KZT 779.50 KZT
BTA
Indicator As of 10/01/11 As of 07/01/11
Authorized capital 1,178,779 mln. KZT 1,178,771 mln. KZT
Equity capital -318,613 mln. KZT -216,681 mln. KZT
Total assets 1,701,575 mln. KZT 1,786,641 mln. KZT
Net income -203,824 mln. KZT -102,562 mln. KZT
Book value of common share -7.29 KZT -4.96 KZT
CenterCredit
Indicator As of 04/01/12 As of 01/01/12
Authorized capital 69,804 mln. KZT 69,797 mln. KZT
Equity capital 87,805 mln. KZT 86,808 mln. KZT
Total assets 1,094,980 mln. KZT 1,081,917 mln. KZT
Net income 578 mln. KZT 2,731 mln. KZT
Book value of common share 456.00 KZT 449.00 KZT
Book value of preferred share 300.00 KZT 300.00 KZT
Halyk Savings Bank
Indicator As of 04/01/12 As of 01/01/12
Authorized capital 143,695 mln. KZT 143,695 mln. KZT
Equity capital 331,372 mln. KZT 310,327 mln. KZT
Total assets 2,544,519 mln. KZT 2,273,930 mln. KZT
Net income 16,818 mln. KZT 39,508 mln. KZT
Book value of common share 242.43 KZT 223.12 KZT
Kazkommertsbank
Indicator As of 04/01/12 As of 01/01/12
Authorized capital 9,016 mln. KZT 9,023 mln. KZT
Equity capital 444,985 mln. KZT 436,632 mln. KZT
Total assets 2,524,929 mln. KZT 2,565,689 mln. KZT
Net income 6,360 mln. KZT 23,520 mln. KZT
Book value of common share 526.06 KZT 551.04 KZT
Book value of preferred share 106.04 KZT 104.89 KZT
KaspiBank
Indicator As of 04/01/12 As of 01/01/12
Authorized capital 17,428,550 th. KZT 17,428,550 th. KZT
Equity capital 53,153,339 th. KZT 50,228,133 th. KZT
Total assets 437,327,497 th. KZT 430,765,676 th. KZT
Net income 3,089,482 th. KZT 8,544,348 th. KZT
Book value of common share 2,704.00 KZT 2,556.00 KZT
Book value of preferred share 582.00 KZT 582.00 KZT

SOURCE: KASE

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