Moody’s revises Alliance Bank (Kazakhstan) ratings

February 18. KASE

Moody's revises Alliance Bank (Kazakhstan) ratingsMoody’s Investors Service has today downgraded Kazakhstan’s Alliance Bank’s long-term local and foreign-currency senior unsecured debt rating to C from Ca. Concurrently, Moody’s affirmed the bank’s E standalone bank financial strength rating (BFSR) and lowered the corresponding baseline credit assessment (BCA) to c from ca. The rating agency also affirmed the bank’s Caa2 long-term local and foreign-currency deposit ratings, its Not Prime short-term foreign-currency deposit rating, and C local-currency subordinated debt rating.

The outlook on Alliance Bank’s deposit ratings remains developing, whilst the BFSR, senior unsecured and subordinated debt ratings carry no outlook.

Moody’s rating action is based on the pending debt restructuring proposed by management in January 2014.

RATINGS RATIONALE

DOWNGRADE OF SENIOR UNSECURED DEBT RATING

In January 2014, Alliance Bank’s management announced that debt restructuring and recapitalisation will be required in order to restore an estimated KZT152.7 billion (approximately $0.8 billion) shortfall in the bank’s capital. This shortfall has arisen as a result of (1) the bank’s already very low capital; (2) a likely increase in loan loss reserves; and (3) a write-down of part of the bank’s deferred tax assets.

The proposed restructuring terms include a haircut of about 70% on Alliance Bank’s approximately KZT90 billion of senior unsecured bonds. Whilst these terms have to be discussed and approved by the bank’s creditors and shareholders, Moody’s considers that there is a limited likelihood that the losses of senior unsecured creditors would be substantially below the proposed haircut. Therefore, C rating reflects the level of likely losses for creditors more appropriately.

DEPOSIT RATINGS AND SYTEMIC SUPPORT ASSUMPTIONS

Moody’s affirmation of Alliance Bank’s Caa2 deposit ratings is driven by the moderate systemic support assumption implied in these ratings given the bank’s government ownership and the support that has been provided to the bank by the government and state-controlled entities. As a result, Alliance Bank’s Caa2 deposit ratings receive three-notches of uplift from its c BCA. The rating agency understands that the bank may be privatised and merged with Kazakhstan-based Temirbank after a successful debt restructuring. In the event of a successful debt restructuring, Moody’s will review its systemic support assumptions in Alliance Bank’s deposit ratings based on the bank’s market shares and overall importance for the Kazakh banking system.

DEVELOPING OUTLOOK ON DEPOSIT RATINGS

The developing outlook on Alliance Bank’s deposit ratings, which indicates that these rating could either be downgraded or upgraded over the next 12 to 18 months, reflect the high degree of uncertainty about the bank’s franchise prospects and its ability to meet its obligations to depositors. This uncertainty derives from (1) the bank’s weakening credit profile characterised by the lack of capital and liquidity cushion, as well as loss-making operations; and (2) the final outcome of the management’s proposed debt restructuring, which could be either debt relief and recapitalisation or the bank’s liquidation.

WHAT COULD MOVE THE RATINGS UP/DOWN

Alliance Bank’s standalone and deposit ratings could be upgraded if the bank successfully completes the announced debt restructuring and restores it solvency and liquidity.

Alliance Bank’s standalone and debt ratings are at the lowest rating level and can’t be further downgraded. Downwards pressure might develop on the bank’s deposit ratings if the announced restructuring terms are not approved, leading to heavier losses for the debt holders and depositors compared to the losses currently anticipated by Moody’s.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Global Banks published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Almaty, Kazakhstan, Alliance Bank reported total assets of $3.8 billion and shareholders’ equity of $33 million, as of end-Q3 2013, according to the bank’s unaudited IFRS financial statements.

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