Among the victims claimed by the global financial crisis, a number of Kazakh banks have been particularly ravaged. Having borrowed heavily abroad and made hefty gambles on local real estate, much of the country's finance industry is flailing.

This might not be a major concern for ABS players, if not for the outstanding DPR programs of three leading originators - Alliance Bank, BTA Bank and Kazkommertsbank (KKB).

Future flow experts especially are watching those programs. In the words of one banker in this space: "What we've got is a living, breathing stress test."

So far, the DPR structures are performing how they're supposed to, and no apparent challenges have arisen from the issuers.

But structural integrity doesn't mean the deals have been quiet, as triggers are tripped by drops in flows, downgrades and other events unleashed by the crisis and the originators' response. What is more, lower commodity prices have eaten into the flows backing the DPR transactions.

BTA - Stay Where You Are!

Still clinging to the slogan "We stay where you are," BTA Bank was effectively nationalized early this year as losses mounted thanks to its overreliance on foreign borrowing and the local real estate business.

The bank, the country's largest, received a $1.7 billion injection from the government's Samruk-Kazyna National Welfare Fund, an entity set up expressly to handle distressed banks. In foreign debt, BTA has about $5.6 billion in Eurobonds and $4.5 billion in syndicated and bilateral loans. It has hired Goldman Sachs and UBS as advisors. The next move will likely involve a restructuring.

As of press time, it was speculated that a proposal could be announced in an April 28 conference call between the bank and its creditors.

In the first quarter, BTA registered a $4.3 billion domestic bond shelf that press reports said could help refinance existing debt. A reported $5.2 billion rise in assets on BTA's balance sheet was a probable sign that the bank had floated tenge-denominated bonds and plowed the proceeds into paper issued by Samruk-Kazyna, according to an emerging market daily by Barclays Capital. The result was more than $6.3 billion in liquid assets as of April 1, a cushion that could be used for a potential buyback.

Nevertheless, as of press time, neither Samruk-Kazyna nor the bank's advisors had made an announcement on specific terms. Officials at neither Goldman nor BTA returned requests for comment.

On April 24, Standard & Poor's cut the underlying rating on all of BTA's DPR bonds to 'CCC' with a Watch Negative after receiving complete full-quarter asset performance data - which deteriorated markedly. The move also reflected the declining credit quality of the originator.

At press time, BTA said it had halted principal payments on its debt. If the DPR bonds continue to function as they're supposed to, an effective default would trigger a call option on the notes, and the bondholders would have a certain number of days to determine whether they want to redeem the notes.

"If BTA declines to redeem the notes, the insurance policy on three of the tranches would begin to cover debt service," said Gary Kochubka, senior director at S&P.

Ambac, FGIC and MBIA wrap different tranches of BTA's program (see table).

While a monoline is the controlling investor in the tranche it wraps, some of the bondholders in the unwrapped piece and in the wrapped ones might not be so keen to push their particular agenda, according to sources.

This is because the main investors in the future flow deals could very well be banks or other institutions with other kinds of Kazakh bank debt. This mix of exposures complicates the stance that an ABS creditor would take should there be challenges to accelerated repayment, while other debt appears to be at a standstill and will probably face some kind of workout.

Sources also said that in such a scenario, vanilla debt creditors would be less likely to divert flows from the future flow deals if the percentage of overall debt held in ABS was small. At about 7.5% of the total foreign debt load, BTA's DPR program is considered on the small side.

Trigger Happy

But even before a callable situation arises, other triggers have been tripped or are likely to be tripped, regardless of the cross-default provision.

On February 27, Moody's Investors Service downgraded the underlying ratings of A-D series of 2007 to 'B1' from 'Baa3', breaching a 'Ba1' ratings trigger on the $750 million program.

Under this trigger, which is based on the underlying rating of each deal, the paydown rate has doubled. As a result, the eight-year notes would be repaid in four years, with the June payment reaching 2X DSCR.

BTA has been funding a reserve account, which could cure this event, but only if the rating were upgraded far enough within a single interest period following the downgrade.

In July, the bank comes out of the "cure" period. If there hasn't been a sufficient upgrade, then the payment schedule would switch to a monthly schedule in August, and the coverage reserve would be applied to pay down the principal balance.

The amount that is flowing into the coverage reserve is related to 60% of the excess cash flow of the deal, with 40% going back to the bank. This right - the attempt to "cure" the event - cannot be exercised more than once during the 12-month period or more than three times during the life of the notes.

The events above would all be superseded by an early amortization trigger, and this is on the verge of being breached. One event that would set off this trigger, for instance, is a drop of the quarterly DSCR to nine or below. In Moody's most recent performance review, which captures flows to March 31, the flows were at 9.88x.

"The quarterly DSCR trigger is precipitously close to being breached," said Moody's analyst Durga Bhavani.

In an early amortization, each month the trustee - in this case Bank of New York Mellon - will use 60% of collections after the debt payment to pay down the bonds. The balance flows back to BTA. "It applies additional cash to noteholders but not full out, which would create a potential liquidity stress for the bank," said S&P's Kochubka. "If everything is functioning, the bank still receives funds through the (40%) excess funds."

Alliance - Ongoing

Standstill in Vanilla Debt

The second distressed DPR originator from Kazakhstan, Alliance Bank, is going through a version of the BTA scenario. As with BTA, the government's Samruk-Kazyna has controlled the bank for a couple of months now.

But Alliance appears to have defaulted earlier, crossing this threshold when it failed to make a payment on a KZT7 billion ($46 million) bond on March 19, according to news reports. On April 13, the bank requested a standstill from creditors while it negotiated with them to hatch a restructuring and recapitalization plan. Local regulatory agency the FMSA said it expected to review this plan within three months.

As of press time, creditors had yet to accept this offer. Alliance officials didn't return an e-mail request for comment.

While a cross-default trigger for the transactions has been tripped, it isn't clear whether controlling parties for any of the notes have declared an early amortization, which follows the typical scenario in which 60% of the flows are retained and used to pay down the deal while 40% flows back to the originator.

Apart from that trigger, a quarterly DSCR trigger was breached after quarterly DSCR fell below 15x in the fourth quarter of 2008. "This resulted in Alliance having to trap 20% of the program's outstanding notes value into a reserve account," said Will Rossiter, associate director at Fitch. While the quarterly DSCR breach was cured in the first quarter of this year, the latest data shows the company has kept the reserve account funded, Rossiter said.

The next payment date for the Alliance DPR program is in May. DPR issuance has totaled $275 million, only about 6.8% of the bank's total foreign debt of close to $4 billion.

Fitch rates Alliance Bank's unsecured long-term foreign currency debt at 'RD' and is keeping the DPR bonds higher - but only slightly - in view of the collateral and structural protections. The agency assigned a 'RR4' recovery rating on the 2006-B and 2007-A notes, which factors in the amount trapped in the reserve account, reportedly at $49.2 million, as well as the pre-funded amount available to meet payments due in May.

The $75 million 2007-A tranche in Alliance's program is wrapped by the Asian Development Bank (ADB), a multilateral that has been able to shrug off the credit woes of other guarantors because it never became involved in dubious assets. The bank has retained its 'triple-A' status at all three rating agencies.

In a recent report, Fitch noted that under an accelerated amortization event, the ADB could decide to follow the scheduled amortization, which might result in an interest payment shortfall, even though it wouldn't hurt the ultimate payments of principal. "However, Fitch believes that the ADB will maintain its commitment to honor the guarantee in full and on time, regardless of the actual repayment schedule," the agency added.

The ADB has an additional relationship with Alliance as a creditor, having lent the bank a $50 million, five-year loan in 2006.

Erratic Flows

One particular area of concern in the Alliance program is the erratic behavior of Kazakh collections, flows between Kazakh institutions that are nonetheless processed by offshore designated depository banks.

In February, Alliance posted a drop in non-Kazakh collections to $1.6 million from $36.1 million in January, a stunning 96% plunge. At the same time, Kazakh flows more than tripled to $154.8 million from $43.9 million.

The greater weight of Kazakh flows in February 2009 - which were given only partial credit in Fitch's initial rating assessment - called into doubt the longer-term prospects for strong collections. "We don't know that this can be maintained," Rossiter said.

And indeed, in March, Kazakh collections crashed, totaling $1.5 million. Meanwhile, non-Kazakh flows rose to $12.9 million. But still, the overall numbers signal serious trouble.

Fitch has also pointed out that capital control legislation, recently approved by parliament, generally boosts the risk of sovereign interference in flows. "We are not sure whether it has been put into force, but there is little doubt that it will," said Rossiter, adding that the legislation allows the president to implement currency controls quickly in case it is needed.

This hazard obviously is not confined to Alliance, with the government able to disrupt flows to all DPR programs.

A Little History with Turkey

There is a precedent in the DPR asset class for what BTA and Alliance are going through.

Turkey stumbled into financial and political crisis in 2000. The government abandoned an exchange rate system in February 2001, which led the Turkish lira to lose about half its value. That year, domestic interest rates soared into the thousands, and real GDP shrank by more than 7%.

In 2001, there were, outstanding, 16 structured finance future flow deals related to DPRs and credit cards in Turkey. Due to tripped triggers, three entered early amortization. They were issued by Pamukbank (acquired by Halkbank in 2004), Disbank (now known by parent company Fortis) and Iktisatbank.

When Turkey saw its rating fall, the resulting downgrades in the three originating banks breached deal triggers. All the deals paid down between three and six months from the tripped trigger.

"It showed that the structure works," said a market source familiar with Turkish DPR transactions. "It's a good parallel with Kazakhstan because it also was a banking crisis in which the government took over the banks."

KKB - Holding On

The third major bank in the Kazakh mix, KKB, is performing better than its peers. Consequently, the government has handled the bank with a lighter hand - having purchased about 25% of the bank and deposited $700 million in the bank earlier in the year.

In fact, KKB was the only one of the country's five largest banks that announced profits in 1Q09.

In a tender led by Merrill Lynch, the bank recently bought back $127 million of its outstanding DPRs, paying $0.92 on the dollar. The bank didn't release a breakdown on the repurchase - which was unlikely to have been evenly spread among the seven tranches given their varying levels of risk.

KKB officials didn't return a request for comment.

While KKB's performance has escaped the worst of the crisis, the bank has still seen its DPR transactions suffer from a drop in energy prices and trade in general.

Also since breaching a ratings trigger, KKB's deals are in the double-time paydown mode, which cuts the life of the respective bonds in half. KKB has been funding the coverage reserve account, but if it doesn't see an upgrade before June, then a mechanism that traps flows at up to 15x the debt service kicks in, said Ning Loh, senior analyst at Moody's. But the flows appear to be strong enough to avoid an additional trigger. "They're unlikely to hit the early amortization trigger based on the level of flows imminently," he added.

(c) 2009 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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