KAZAKHSTAN BONDS THE ASSOCIATION OF BONDHOLDERS OF BTA BANK OR ASTANA FINANCE

About the ABBA

We are the Association of Bondholders of BTA Bank or Astana Finance (ABBA).

ABBA was formed to represent retail bond-holders in debt restructuring negotiations proposed by BTA Bank and Astana Finance.  In the event of bond-holders incurring losses as a consequence of restructuring, ABBA will promote class action law suits against the auditors of BTA Bank and Astana Finance and against the investment banks and advisers that promoted these restructurings.

The Changing Attitude of Kazakhstan to the Debt Capital Markets

Encouraged by investment bankers spruiking “liability management” solutions, Kazakhstan has dramatically altered its attitude toward the debt capital markets.  For example:-

(1)  On 20 October 2008 the Prime Minister, Mr Masimov, told Bloomberg “the Kazakh banking system with the support of the government and the central bank will fulfill all obligations to international investors”.

(2) On February 6 2009 Prime Minister Masimov repeated that assurance in Parliament, saying: “We will not allow … uncontrollable events such as bank defaults or insolvencies” (reported by Reuters).

(3) It was not until the appointment of Goldman Sachs and UBS as “restructuring advisers” that Kazakhstan began to assert the possibility of “haircuts” for the bond-holders.  The Deputy Chairman of the Financial Supervision Agency, Mr Kozhakhmetov, could barely contain his enthusiasm in an interview with Reuters announcing that “a discount of 60 per cent on Eurobonds would be great”.  Perhaps not so great for the bond-holders.

(4)  On 17 April 2009 Mr  Saidenov, the CEO of BTA Bank insisted on BTA’s own website that non-performing loans stood at 9.5%.  But with the possibility of “haircutting” creditors now on the table, BTA provided for losses in an amount equal to near half of its entire balance sheet. “Scare ‘em then shear ‘em” seems to be the approach.

(5)  For its part Astana Finance was silent until days after it missed a coupon and only then revealed it would not meet interest obligations on its international debt.  Post the appointment of JPMorgan as its adviser Astana’s announcements are also disconcertingly ominous, invoking that old chestnut, the recently discovered ’specualtive’ derivative trade.

Kazakhstan Sees Default as an ‘Easy Out’

ABBA believes that Kazakhstan has seized upon the global financial crisis to burden creditors with the lack of oversight demonstrated by its banking regulators and the outright deceit of the banks they were supposed to oversee.  But little sympathy can be expected from Yelena Bakhmutova, the head Kazakh banking regulator, who declared to Reuters on April 300 that “the creditors should have realised what they were doing”.  No doubt creditors thought they were buying debt issued by financial institutions the Government had assured would not fail. Perhaps they thought these institutions would be regulated with something approaching integrity and diligence.  Maybe they were impressed by the supposed audit of these companies by Big 4 firms according to IFRS.

Investors should not compound credulousness with naivete.  ABBA is concerned that the debt restructuring process will be neither equitable or transparent.  The fact is, with oil at $85 per barrel, over $50 billion in the state investment fund, more than $50 billion in ‘loans for resources’ from Russia, China and Korea and the IMF pledging a stand-by credit facility, Kazakhstan can afford to salvage its financial sector and its reputation in the capital markets. Kazakhstan need not become the “small version of Iceland” predicted by economist Nouriel Roubini. But, presumably encouraged by the result in Ecuador and by the investment bankers advising it, Kazakhstan instead threatens the bankruptcy of its systemic financial institutions

Investors should not shrink from that challenge. The bankruptcy of key financial institutions, the resulting collapse of Kazakhstan’s financial system and the consequent social ramifications are outcomes Kazakhstan’s political elite need not risk.

Bankruptcy Not Necessarily Adverse to Bond Holders Interests

ABBA is by no means convinced bond-holders will be worse off by by having these entities undergo the process of conservatorship or liquidation. As it stands investors are asked to suspend belief and just accept that BTA lost half of its balance sheet in the last year. There are no details as to how, but former management of the bank has been charged with embezzlement.  Creditors simply have no conception as to the bank’s prospects of recovering these losses.  If it were possible, the situation at Astana Finance is even more opaque.  Apart from the discovery of speculative’ derivatives transactions and a general decline in asset quality Astana has given no guidance whatsoever.  This is unacceptable and should not be accepted.

The situation will be different in the formal process of conservatorship or administration. Creditors will have greater influence over that process than the proposed debt restructuring. Perhaps the administration of these entities will shed light upon the true possibilities for recovery of losses.  And let us not forget that the administrator on behalf of the creditors can equally sell BTA to Sberbank.

ABBA also believes bond-holder losses may be recouped through legal action. In the case of BTA, it is incomprehensible that a properly regulated and audited financial institution could incur losses equivalent to 40% of its balance sheet in a single year.  ABBA will instigate class action lawsuits against Kazakhstan (the failure of the Financial Services Authority to fulfil regulatory duties), Ernst and Young (negligence in the BTA audit), Goldman Sachs and UBS (interference in contractual relations, inducing breach of contract).

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