With a national economy on steroids, an apparently supportive government, and positive ratings actions, the three leading banks in Kazakhstan are ripe for securitizing their electronic money flows, according to sources. Arrangers are pitching, but not everyone is cheering on Halyk Savings Bank, Kazcommertsbank and Bank TuranAlem, according to sources. The European Bank of Reconstruction and Development (EBRD), reportedly wielding influence through shareholdings and creditor relationships, is opposed to their taking the securitization route.

EBRD officials did not answer a request for comment as of press time.

"They're wary of the future flow structures," said one well-placed source. Despite that, Halyk, at least, has executed a future flow deal, placing a $100 million, five-year securitization of diversified payment rights (DPRs) via lead WestLB on Sept. 3, 2003. Rated Baa2' by Moody's Investors Service, the paper priced at 350 basis points over three-month Libor.

Established in 1991, the EBRD seeks to foster the private sector in fledgling democracies across the region of Central and Eastern Europe and the former Soviet Union. It has a 15% share in Kazcommertsbank and a 3.2% holding in TuranAlem, but its clout among Kazakhstani banks has more muscle than those stakes might suggest, thanks to a hands-on creditor relationship, sources said.

To be sure, the backing of the EBRD is generally seen as a positive. "The involvement of the EBRD will help to further strengthen the bank's corporate governance and facilitate the transfer of know-how," Moody's said in a 2003 report on Kazcommertsbank.

And, of course, it's not unheard of that unsecured creditors would frown on clients selling off future receivables, but securitization players said these concerns are often overblown, especially in the world of emerging-market banking transactions. "DPR deals tend to be small in scale and the overcollateralization is set up so most of the money flows back to the banks anyway," said one source. The EBRD is reportedly reconsidering its stance at the behest of interested parties.

Multilateral lending institutions can impact structured deals in other ways as well. A recent $1.25 billion structured bond by Russian energy juggernaut Gazprom raised concern among some target investors about the negative pledge covenants embedded in World Bank loans to the Russian sovereign. The pledge "requires that any security granted to a creditor over public assets for external, foreign-denominated debt should equally and rateably secure the principal of the World Bank debt," as defined by Fitch Ratings. Since some argued that the Russian government has de-facto control over the company, the pledge was perceived as potentially covering the assets pledged in the Gazprom deal. At any rate, the structure was reportedly designed around the pledge.

Big ratings gap for unsecured debt

Despite the dearth of securitization among Kazakhstani banks, the doors to the global bond market have been wide open to the reigning trio. Kazkommerts has about $920 million of outstanding issuance, while TuranAlem has $825 million outstanding.

Meanwhile, Halyk is currently in the market with a $200 million, five-year corporate deal led by JPMorgan Securities and Credit Suisse First Boston. Moody's, Standard & Poor's and Fitch Ratings have rated the transaction Baa2'/'B+'/'BB-', respectively.

The chasm between Moody's rating on the one hand and Fitch and S&P's on the other, reflects dramatically different views on the risk of the issuers. There's a similar distance between the ratings on unsecured debt from Kazkommerts and TuranAlem.

Neither Fitch nor S&P has rated a plain corporate deal from a Kazakhstani bank investment grade. With a securitization, it would be different.

"We think a couple Kazakhstani banks could hit investment grade in a DPR transaction," said Kevin Kime, director at S&P. Fitch has a similarly hopeful view that securitized banking transactions from the country would break the double-B plus barrier.

For these issuers, the advantage of a securitized deal would be to broaden the audience of buyers. "You could reach a different category of investors and the spreads might be slightly tighter," said David Lautier, an analyst at Moody's.

What's more, a double investment-grade rating would open the sector up to the leading monoline insurers, which avoid transactions that don't reach high grade at both S&P and Moody's. Recent banking upgrades by S&P in Turkey, for instance, promptly aroused the interest of guarantors (see ASR 9/13/04).

Having issued the only public DPR deal last year, Halyk could issue more off the program, according to Lautier. The deal's characteristics shed light on what might lie ahead for its peers.

Collateral in the transaction was multidenominational. The special purpose company, based in Jersey in the Channel Islands, purchases existing and future receivables in dollars, euros, Swiss francs, yen, and British pounds. The payments sent to the deal's obligors - its correspondent banks - cover export payments, check transactions, letter of credit transactions and other flows. Among the correspondent banks bound to the structure are American Express Bank, The Bank of New York, Deutsche Bank Trust Co. Americas, Citibank, and WestLB. The banks account for over 95% of payment right flows via Halyk between June 2002 and June 2003.

Some 40% of the bank's export clients are concentrated in the oil and gas sector, the engine of the Kazakhstani economy. The DPRs are geographically spread across 100 countries, with about 40% flowing from the U.S. Halyk processed $1.3 million of e-money flows in 2002, a 32% jump from 2001.

Brisk growth on the back of soaring energy prices has endeared the Republic of Kazakhstan to investors and helped strengthen the government's standing with credit-rating agencies. S&P upped the long-term foreign currency to BBB-' from BB+' in May of this year and Moody's upgraded the outlook of its Baa3' foreign-currency rating on the sovereign to positive in July. Fitch, meanwhile has kept its BB+' rating on positive outlook since November of 2003.

The average per-capita growth in the country's gross domestic product has roared ahead at over 10% over the last five years. S&P predicts expansion to continue at a blistering 8.8% and 7.0% in 2004 and 2005, respectively. The agency applauds the fact that explosive energy-led growth has not derailed prudent fiscal and monetary policies.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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