Kazakhstan-Based Alliance Bank Ratings Lowered To 'D/D' On Expected Debt Restructuring And Missed Payment
Publication date: 11-Feb-2014 10:19:16 GMT
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We understand that Alliance Bank missed a payment due to noteholders on
Dec. 26, 2013. Then on Jan. 23, 2014, the bank announced its intention to
restructure outstanding senior and subordinated bonds.
A week later, on Jan. 31, 2014, Alliance announced the Board of
Directors' decision to start restructuring the bank.
We consider that the nonpayment will be a general default and that
Alliance Bank will fail to pay all, or substantially all, of its
obligations as they come due.
As a result, we are lowering our ratings on the bank to 'D/D' (default)
from 'CCC/C'.
At the same time, we are lowering our ratings on the bank's senior
unsecured debt to 'CC' from 'CCC' and those on the subordinated debt to
'C' from 'CCC'.
FRANKFURT (Standard & Poor's) Feb. 11, 2014--Standard & Poor's Ratings
Services said today it had revised its long- and short-term counterparty
credit ratings on Kazakhstan-based Alliance Bank JSC to 'D/D' from 'CCC/C'.
At the same time, we lowered our Kazakhstan national scale rating on the bank
to 'D' from 'kzCCC+'.
We also lowered our ratings on the bank's senior unsecured debt to 'CC' from
'CCC' and the ratings on the subordinated debt to 'C' from 'CCC'.
We understand that Alliance Bank failed to pay holders of its "recovery
notes," due on Dec. 26, 2013. According to our definition, this means the bank
is in default, leading to a rating that is 'D' (default) or 'SD' (selective
default). Additionally, due to this nonpayment, the bank breached regulatory
liquidity requirements, which appears to constitute a covenant breach under
Condition 11 (l) of the documentation for the par notes and discount notes,
two further classes of senior unsecured debt.
The next coupon payment date is March 25, 2014, for the bank's discount
Kazakhstani tenge (KZT) and U.S. dollar notes, due in 2017; the senior par KZT
and U.S. dollar notes, due 2020; and the subordinated KZT notes, due in 2030.
However, on Jan. 31, 2014, the bank announced the Board of Directors' decision
to start restructuring the bank. In our view, a restructuring would likely
result in the noteholders taking substantial haircuts against the principal
and accrued coupon amounts.
We therefore consider that the nonpayment will be a general default and that
Alliance Bank will fail to pay all, or substantially all, of its obligations
as they come due. We have therefore lowered the ratings to 'D'.
In accordance with our criteria, we also lowered our ratings on the notes to
reflect our expectation that nonpayment is a virtual certainty. In the case of
the subordinated notes, we also consider their lower relative seniority and
our expectation of lower ultimate recovery. If Alliance Bank fails to pay the
coupons due on March 25, we would lower the ratings on these instruments to
'D', unless the noteholders have accepted a purchase offer at below par and we
have already lowered the ratings to 'D'.
Even if, contrary to management's currently stated intent, the bank paid the
March coupons, we would likely regard the planned bond restructuring as
"distressed" and tantamount to a default. This is based on our understanding
that the investors would receive less value than the original promise and
because, in our view, there is a realistic possibility of a conventional
default, absent the restructuring.
In December 2013, Kazakh businessman Bulat Utemuratov reached a binding
agreement with Samruk-Kazyna to purchase 16% of Alliance Bank's preferred and
common shares. After the transaction, Samruk-Kazyna would retain its majority
stake of 51% in the bank. The restructuring follows the bank's announcement of
an expected capital shortfall of KZT152.7 billion at year-end 2013, due to
significant additional provisions late last year and the de-recognition of a
deferred tax asset. The bank is planning to complete restructuring
negotiations by June 30, 2014. This restructuring comes five years after the
first debt restructuring and recapitalization plan that Alliance agreed with
its creditors at the request of the central bank.
We have revised our assessment of Alliance Bank's stand-alone credit profile
(SACP) to 'cc' from 'ccc', reflecting our expectation that default is a
virtual certainty. Within the assessment, we have revised our evaluation of
the bank's:
Business position to "weak" from "moderate," due to the likelihood of
franchise damage arising from the default and the associated business
instability; and
Liquidity to "very weak" from "adequate," reflecting our view that the
planned restructuring will have weakened the confidence of investors,
leading to the bank having noticeably weaker liquidity than other Kazakh
banks. That said, we understand that the bank is currently honoring its
obligations to depositors.
The other factors within our SACP assessment remain unchanged. After the bond
restructuring we would review the ratings on the bank based on its new capital
structure and business and financial profiles.