The CEO of Kazakhstan's Alliance Bank, Makshat Kabashev, said in a conference call on May 29 that the originator's three DPR bonds, totaling $275 million at issuance, could fall into the scope of any of the proposed restructurings of the ailing bank's debt.

The determining factor will be Alliance's cash flow, he added, but did not elaborate, and press representatives did not return e-mails requesting further details.

If the bank decides to pursue this course, the bondholders might not be as inclined to fight as they would be in a transaction with a healthy stream of payment orders. The deals, after all, are already on the brink of a default occasioned by an evaporation of DPR flows.

"It would be difficult for the bonds to make payments in May," said Will Rossiter, associate director at Fitch Ratings. The agency currently rates the 2006-B and 2007-A tranches of the bank's DPR program at 'CC'. The outstanding amounts are $67.9 million and $75 million, respectively.

The remaining tranche - the 2007-A series - has $95 million remaining and is rated 'AAA' thanks to a guarantee from the Asian Development Bank (ADB).

Collections in April amounted to $13.5 million for non-Kazakh flows, remaining steady from March, and fell precipitously between those months from $1.5 million to $200,000 in the case of the Kazakh flows. Non-Kazakh flows refer to those between a local entity and a foreign one, which by their nature typically involve an offshore depositary bank. Kazakh flows, meanwhile, are collections between onshore Kazakh institutions that are nonetheless processed by an offshore depositary bank.

Overall, the debt service coverage ratio (DSCR) for Alliance's program fell to 1.2X, which has triggered early amortization.

Rossiter said a prefunded account could have covered payments due in May if the early amortization hadn't kicked in. But as it is, the deal is in double pay-down mode, which means that it is unlikely there was enough to meet the May payments. In addition, early amortization means that 60% of the collections are being used to repay the notes and 40% are being retained by the originator.

ADB Stays Constructive

In an e-mailed response to questions, an official at the ADB said that the guarantee on the 2006-A notes has not been drawn yet. In the case that the policy is drawn, the official said the development bank "will weigh its contractual options, which include, among others, payment under the original contractual schedule or prepayment of the transaction. The ADB continues to hope for and, where it can, work toward a constructive solution to Alliance Bank's current financial difficulties."

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

Like other Kazakh banks blindsided by the financial crisis, during the boom years leading up to late 2007 Alliance engaged in transactions that reveal poor corporate governance.

Even on the DPR side, there has been speculation of shady maneuverings. The extreme drop in Kazakh flows to $200,000 in April after they had more than tripled in volume between January and February has suggested to a few market sources that a form of manipulation was at work.

One market source said it was possible the bank could have had the government convince companies with electronic payment orders to use Alliance and clear it through one of the depositary banks designated in the program. But a tactic like this can inflate figures for only a month or so, especially in the midst of a shrinking economy and financial crisis.

Epic Lapse

in Corporate Governance

Pumping up flows in this manner would, at any rate, be a hiccup in corporate governance compared to the bank's most egregious misstep - a baffling $1.1 billion hole in the balance sheet that, in March, the new management had "discovered" and disclosed with scant details.

The company stopped paying creditors when it announced this massive liability.

In the conference call, CEO Kabashev outlined the cause of the loss, which, he added, will likely lead to a write-down for the full amount. The liability is linked to U.S. Treasury securities the bank had pledged to two counterparties, both "big Russian financial institutions." One counterparty extended loans to two offshore companies for $612 million, which were guaranteed by Alliance for a total of $560 million worth of Treasurys that were deposited with that counterparty. The other counterparty received a deposit of $542 million in Treasurys pledged by Alliance for a similar operation, the CEO said.

"The guarantees...were not recorded in the books," he added. "The new management discovered that these U.S. Treasury securities were pledged and...were not properly approved by the bank." The counterparties made claims under the arrangement when the loans to the offshore borrowers defaulted.

Shortly after the government's Samruk-Kazyna National Welfare Fund took over the struggling bank in early February, Fund Chairman Kabashev became Alliance's CEO. Since then Alliance's former management appears to have retreated into the shadows, in sharp contrast with ex-executives from Kazakh peer and fellow defaulter BTA Bank.

BTA saw a similar management shuffle when the Fund took over, but that was only the prologue to a drama that features former CEO Mukhtar Ablyazov facing embezzlement charges from the government and making accusations himself of reckless behavior by authorities during the economic boom. By all accounts Ablyazov is a fugitive, speaking to the press from an undisclosed location outside the country, according to news reports.

Looming Deadline for Alliance

Alliance has a total $4.2 billion in debt, including about $3 billion in securities. Kabashev said the price of the bank's Eurobonds had bottomed at 10% of face value at the end of April, rising to around 20% in mid-May. One of its proposals is to offer bondholders 20 cents on the dollar.

Local regulator Financial Supervision Agency will move Alliance into a conservatorship if the bank doesn't reach a satisfactory agreement with creditors by July 15. The bank first stopped paying creditors when it failed to make a payment on a KZT7 billion ($46 million) bond on March 19, according to news reports.

At press time, BTA was expected to announce its own restructuring proposal on June 4. Research analysts at Barclays Bank expected the terms to be more generous to creditors than Alliance's proposal, with a haircut of 60%-70%.

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

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