Alliance proposes a plan for the second restructuring
Bakai Madybaev — January 24, 2014
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On January 23, Alliance Bank presented a restructuring plan in a meeting between the creditors and shareholders in London. Alliance's shareholders, the National Fund Samruk-Kazyna and Bulat Utemuratov, offered a 70% haircut on senior debt and 90% on subordinated debt as a way to close a $1bn capital gap. The bondholders are expected to vote on the offer in April.
The management admitted that the bank needs to create additional provisions of T78bn ($500mn) against the non-performing loans. The bank also sees a need to devaluate the deferred taxes by T17.3bn to reflect lower expectations of future profits. After these adjustments are made capital will be in deficit by T67.9bn. In order to restore capital from that level to the targeted 20% for the tier-1 ratio, or T84.8bn, the bank needs recapitalization by T152.7bn ($1bn).
Alliance shareholders, Samruk-Kazyna and Bulat Utemuratov, are ready to provide T57.1bn of that amount, but ask the bondholders to supply the rest. Samruk-Kazyna's support comes only in the form of restructuring of its deposits in Alliance and Temirbank (term extension to 10 years and interest rate cuts). The conversion of a T65bn deposit in Alliance should increase its tier-1 capital by T24bn, while the conversion of a T70bn deposit in Temirbank should bring additional tier-1 equity of about T13.2bn, we estimate. Mr. Utemuratov's contribution comes in the form of excess capital at Temirbank, which Mr. Utemuratov would merge with Alliance bank under the plan. After the conversion of Samruk-Kazyna's deposit, Temirbank would have an excess capital of, according to our estimates, T21.8bn. Alliance management also vaguely stated that the merger "would likely lead to recognition of additional Deferred Tax Assets of T11.3bn, although Deferred Tax Assets of Temirbank itself would be written off". This part of the transaction remains unclear to us. Mr. Utemuratov bought Temirbank from Samruk-Kazyna last Fall for an undisclosed amount.
Bondholders are requested to make a T95.6bn contribution by accepting the following haircuts:
Security classMaturityCurrencyOutstanding principal value, KZT bnIFRS amount, KZT bnRecovery value, % of principalHaircutContribution, KZT bnForm of compensationSenior2017USD67.270.430.2%71.2%50.5Debt exchange KZT0.50.52020USD22.619.630.2%65.3%13.5Debt exchange KZT1.31.2Subordinated2030KZT24.920.910.1%88.0%18.4Debt exchange or cashRecovery notes USD 14.7$10 per unit90.0%13.2Cash
Total contribution95.6 Our view
The terms of restructuring are worse than the terms of the second restructuring adopted by BTA creditors a year ago:
Offer of the second restructuring by Alliance BankSecond restructuring of BTA BankCompensation formDebt exchangeMostly cash with some debt exchangeRecovery value30.20%42.6% of cash + debt of about 3%Samruk-Kazyna's contributionExtension of terms and decrease of interest rates of T135bn deposits
- Conversion of a T150bn* deposit into equity;
- Increase of coupon rate on its bonds held by the bank;
- Provision of a $1.6bn subordinated loan to finance cash repayments to bondholders
Targeted Tier-1 ratio20%10%
* Halyk Finance estimate
Samruk-Kazyna has reasons to be tougher this time. With less resources after a series of restructurings, Samruk-Kazyna may try to wring out the legal agreement from creditors by aiming at 'just-enough' votes to count as qualified majority. It might perceive the decisive majority that it achieved in previous restructurings as wasteful and the political risks associated with the holdouts as worth taking.
Given that a day before the restructuring plan release Alliance's senior bonds traded at 47% (Fig. 1), substantially above the proposed 30% recovery value, the offer made by Samruk-Kazyna and Mr. Utemuratov grossly missed market expectations. This suggests that creditors are unlikely to accept the proposed deal termsand would try to negotiate a much larger contribution at least from Samruk-Kazyna. We believe Mr. Utemuratov's negotiating position is quite strong as his involvement in the Alliance's equity should not have cost him much, if anything. Given a high probability of the current deal terms to be rejected, we expect the restructuring process to extend beyond the planned June 2014 period.
Alliance shareholders, Samruk-Kazyna and Bulat Utemuratov, are ready to provide T57.1bn of that amount, but ask the bondholders to supply the rest. Samruk-Kazyna's support comes only in the form of restructuring of its deposits in Alliance and Temirbank (term extension to 10 years and interest rate cuts). The conversion of a T65bn deposit in Alliance should increase its tier-1 capital by T24bn, while the conversion of a T70bn deposit in Temirbank should bring additional tier-1 equity of about T13.2bn, we estimate. Mr. Utemuratov's contribution comes in the form of excess capital at Temirbank, which Mr. Utemuratov would merge with Alliance bank under the plan. After the conversion of Samruk-Kazyna's deposit, Temirbank would have an excess capital of, according to our estimates, T21.8bn. Alliance management also vaguely stated that the merger "would likely lead to recognition of additional Deferred Tax Assets of T11.3bn, although Deferred Tax Assets of Temirbank itself would be written off". This part of the transaction remains unclear to us. Mr. Utemuratov bought Temirbank from Samruk-Kazyna last Fall.
Fig. 1. Alliance and Temirbank Eurobond prices, cents on a dollar