Default Alarms Go Off as Azeri Bank's Collapse Prompts Scare

Shockwaves from a default by the biggest bank in Azerbaijan are spreading to its neighbor on the opposite shore of the Caspian Sea.

Already burned by the International Bank of Azerbaijan’s missed payment and its effort to wrest a 20 percent principal writedown in a proposed debt restructuring, investors are starting to wonder if Kazakhstan’s Kazkommertsbank is the next domino to fall. Its $250 million of subordinated bonds are trading below par only two weeks before maturity, a sign the bank’s ability to come through is in doubt.  

“Certainly some bondholders fear” that the Kazakh bank will follow in the footsteps of the Azeri lender, said Lutz Roehmeyer, who manages about $2.2 billion including IBA and Kazkommertsbank bonds at Landesbank Berlin Investment. “The ranking of the bonds is similar. I think the fear here is simply non-payment.”

The crash in oil prices exposed vulnerabilities in the economies of Kazakhstan and Azerbaijan, the former Soviet Union’s second and third biggest crude producers, by shaking the confidence in banks and forcing currency devaluations. The handling of Kazkommertsbank could risk further backlash among investors already put off by a decade of defaults, debt restructurings and bailouts of Kazakh lenders.

Kazkommertsbank lost its footing after absorbing twice-defaulted BTA Bank in 2014, with its finances further upended by oil’s collapse. Until recently the top asset holder among Kazakh lenders, it’s already required a 2.4 trillion-tenge ($7.7 billion) state bailout via a purchase of bad assets to pave the way for its acquisition by Halyk Bank

“Kazakhs will watch the Azeri story and keep paying for now,” Alexey Tretyakov, money manager at Aricapital Asset Management in Moscow, said by email. “If the haircut is forced through, then they may well repeat it.”

Under Siege

Since November, Kazkommertsbank has had to endure an exodus of depositors that reduced holdings on corporate accounts by about a third. It retains access to a special loan of 200 billion tenge from the central bank, which it rolled over in March, on top of another 200 billion tenge borrowed from it in February. Speaking in an interview last November, President Nursultan Nazarbayev said Kazakhstan won’t let the bank collapse.

The market, however, isn’t yet convinced the worst is behind it. Even after the bank said on Friday that it plans to repay the subordinated bonds in full using its own money, the securities continue to trade below 100 cents on the dollar. They fell on Tuesday after three days of gains, dropping to 96.35 cents.

Kazkommertsbank’s “statements are aimed at showing that it has sufficient liquidity for at least redeeming its short-term liabilities,” Alexey Bulgakov, a fixed-income analyst at Sberbank CIB in Moscow, said by phone. Still, the situations are different in that Kazakhstan is witnessing a “consolidation of the biggest banking institutions in a single pair of hands. In Azerbaijan, the sovereign thought it can save at creditors’ expense, since it’s completely taking over a bad bank.”

Rehab Plan

The International Bank of Azerbaijan wants to restructure $3.3 billion in foreign debt after missing a principal and interest payment on a $100 million subordinated loan on May 10. Kazkommertsbank has a total of $3.8 billion in debt, according to data compiled by Bloomberg. After its June 2017 notes mature, the Kazakh lender has a $300 million bond coming due next May, followed by $750 million in December 2022 securities which could be called in June 2017.

S&P Global Ratings said in May that Kazkommertsbank used the central bank’s liquidity line to repay its senior unsecured bond in February and survive deposit withdrawals in December. S&P now expects it to draw on the facility again to repay its callable notes due in June. Although the rating company sees its liquidity as “adequate,” the cushion is “low” at about 5 percent of total assets as of end-April, given “its apparent inability” to borrow in the wholesale market.

While Kazkommertsbank is systemically important for Kazakhstan, the state only owns 10.7 percent of its ordinary shares through sovereign wealth fund Samruk-Kazyna. But the costs of keeping it afloat are starting to add up. Moody’s Investors Service estimates the government will run a deficit of about 7.6 percent of gross domestic product this year as a result of “one-off measures related to the recapitalization” of banks.

The effort to prop up Kazkommertsbank already marks the government’s biggest bank rescue since the global financial crisis led to $20 billion in debt restructuring by lenders. Considering the legacy of those bailouts, Kazakhstan is now more likely to proceed with caution, said Roehmeyer, who held bonds in Kazakh lenders during the 2009 restructurings.

“I hope now that Kazkommertsbank and Halyk will come together without imposing any losses” on bondholders, he said. “A merger would be the first step to rebuilding confidence in the Kazakh banking system.”

— With assistance by Vladimir Kuznetsov

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