Kazakhstan Wealth Fund Sued in U.S. by BTA Bank Investors

Dec. 6 (Bloomberg) -- Investors who purchased tens of millions of dollars of BTA Bank’s subordinated bonds are seeking to recover all damages from the institution’s controlling shareholder, Samruk-Kazyna, alleging in a lawsuit that they were defrauded by Kazakhstan’s sovereign wealth fund.

The investors claim in a lawsuit in Manhattan federal court that BTA, which isn’t named as a defendant, defrauded them by inducing them to buy securities as part of a 2010 debt restructuring. The bank did so, the investors claim, by promising that virtually no dividends or distributions would be paid to Samruk-Kazyna, which is a defendant.

“S-K Fund and BTA had devised a scheme to circumvent the express restrictions on dividends,” according to the complaint. “The scheme was implemented by BTA Bank, paying S-K Funds interest on its deposits at an exorbitant above-market rate of approximately 10 percent.”

Almaty-based BTA, which is seeking a second restructuring accord by the end of this year, said yesterday it won the support of a majority of creditors for its $11 billion debt overhaul, cutting its liabilities by about 70 percent. Including cash and new notes, BTA is offering a payoff of 21.1 cents on the dollar of the amount restructured, according to UBS AG.

Samruk-Kazyna took over BTA, the central Asian nation’s biggest bank by assets at the time, two months before its default in April 2009. The fund hasn’t yet been notified of the lawsuit and won’t respond to the allegations until receiving an official notice, Umirzak Shukeyev, Samruk-Kazyna’s chief executive officer, told reporters today in the capital, Astana.

Samruk Bailouts

The wealth fund was handed control of assets that account for about half of Kazakhstan’s economic output after bailing out banks and companies hit by the 2007-2009 financial crisis. It agreed in October to provide a $1.59 billion interest-bearing loan to BTA to enable the bank to repay creditors.

According to the terms of the second restructuring agreement, holders of subordinated bonds will absorb a loss of 97.5 percent, the biggest among the bank’s noteholders, according to a BTA presentation made yesterday. Holders of more than $750 million of tenge, U.S. dollar and euro-denominated subordinated debt will swap the securities for about 1.5 percent of BTA shares, the lender said on its website.

The shares fell 2.6 percent to 0.38 tenge at the close in Almaty today, valuing Kazakhstan’s third-largest lender by assets at 16.8 billion tenge ($112 million), according to data compiled by Bloomberg.

BTA, which won 92 percent creditor approval for the first restructuring plan in May 2010, this time secured the support of creditors holding 93.8 percent of total debt.

Negative Carry

Samruk-Kazyna “was motivated to increase its own recovery in connection with the 2010 restructuring and thereafter by negotiating restructuring terms that appeared fair to BTA Bank’s creditors and potential investors, but in fact concealed that defendant would receive extraordinary interest payments after the 2010 restructuring, particularly from the negative carry swap,” according to the complaint in New York.

A negative carry is incurred when an asset’s return is less than the interest rate charged on the loan used to buy an asset. Excluding the information about the negative carry swap helped build support for the 2010 agreement and lured potential buyers of subordinated notes, the investors said.

Doomed Hopes

The resulting negative carry “doomed any hope for a successful restructuring from the outset,” the investors said.

The sovereign wealth fund is owned entirely by the Republic of Kazakhstan, according to the complaint. The bank isn’t named as a defendant because it’s now undergoing a second restructuring in U.S. Bankruptcy Court in New York.

“The recently reported lawsuit against Samruk-Kazyna will likely put further pressure on investors’ sentiment and could negatively affect the effort of Samruk-Energo to issue a potential $200 million deal,” Mariya Gancheva, an emerging markets strategist at Mitsubishi UFJ Securities International Plc, said by e-mail.

Plaintiffs including Atlantica Holdings Inc., Baltica Investment Holding Inc., Allan Kiblisky and Jacques Gliksberg say they purchased tens of millions of dollars of subordinated debt securities issued by BTA Bank.

The case is Atlantica Holdings v. Samruk-Kazyna, 12-cv-08852, U.S. District Court, Southern District of New York (Manhattan)

To contact the reporters on this story: David Glovin in New York at dglovin@bloomberg.net; Nariman Gizitdinov in Almaty at ngizitdinov@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Stephen Voss at sev@bloomberg.net