Having secured entree to Europe's corporate-bond and loan markets, over the last two years the leading Kazakh banks have skipped the time-consuming structured route. But that doesn't preclude the occasional trip, as evidenced by news that the country's largest commercial bank, Kazkommertsbank, is coming to market with a $300 million bond backed by diversified payment rights. What's more, a peer, rumored to be Bank TuranAlem, is apparently following suit within the next several months.

In the case of Kazkommertsbank, monoline insurer appetite and the bank's desire to diversify funding and stretch out its debt profile have created the right economics for a DPR transaction, according to sources. But the jury is still out on whether those, or other, factors can build a more lasting marketplace of Kazakh DPR deals.

"Kazkommerts fits right into the better-rated future flow deals that we've done," said Diana Adams, managing director of emerging markets at Ambac Assurance, which is wrapping a $200 million, seven-year tranche of the upcoming transaction. Moody's Investors Service and Standard & Poor's have assigned Baa1' and BBB', respectively, as the underlying ratings of the wrapped portion and as the straight ratings on two unwrapped tranches for $50 million apiece. The unwrapped series was reportedly pre-placed.

The transaction could be the first wrapped structured deal out of the former Soviet Union, according to one source familiar with the sector. Certainly, it is the first wrapped future flow deal from the region. JPMorgan Securities and WestLB are joint leads for the wrapped tranche, while WestLB is sole lead on the unwrapped piece, according to a source close to the deal. The deal is Reg S registered only. "There's enough demand from European investors," the source said. WestLB has already put its stamp on the Kazakh DPR business, having arranged a secured facility for Halyk Savings Bank of Kazakhstan. Underscoring the embarrassment of riches enjoyed by the country's leading banks, that deal was upgraded to Baa2' from Baa1' by Moody's partly because of a rise in the underlying DPRs.

Kazkommertsbank's total DPR flows hit $3.12 billion last year, up 19% from 2003, when they had ballooned by 60%. This business is tightly bound to export industries, either through payments made by importers of Kazakh goods or foreign direct investment in the burgeoning energy sector. Roughly 57% of the bank's DPR flows were to pay 20 companies in the oil and gas sector. Remittances from Kazakh workers living abroad make up a trivial portion of the DPRs, similar to other banks in the country. That's because Kazakhstan's booming economy has kept the country's workers at home, sources said. "They aren't exporters of labor," said Ambac's Adams. This contrasts with countries like El Salvador, where massive volumes of remittances from ex-patriot labor are major drivers of DPRs.

Bank TuranAlem, Kazakhstan's second largest commercial bank, might be the next in the country to tap its DPRs, according to sources familiar with the industry. Fitch Ratings, Moody's, and S&P give the bank foreign currency ratings of BB', Ba1,' and BB-', respectively.

Even if TuranAlem comes within the next several months and Halyk returns with a market-based deal, it isn't clear whether DPR issuance from Kazakh banks will be more than sporadic. "The accelerated growth of the Kazakh banking system has only materialized in the last half decade; the system still remains relatively small," said Magar Kouyoumdjian, an associate at S&P. "Most of the oil investments started happening about 10 years ago." He noted that the leading banks' loan books have been expanding at 50% a year over the last few years, hence their voracious appetite for funding.

Sources have also noted that while European banks and bond investors have embraced Kazakh banks, they are still charged a premium over their ratings category, which may provide an incentive to securitize.

Monoline insurer appetite will also play a key role. If others hop onto Ambac's coattails, and especially if they start to vie with each other by offering attractive fees, the economics would favor more frequent securitization issuance.

Still, even the most optimistic projections for the next few years don't come close to the kind of bustling activity from DPR veteran Turkey, which is larger and has more diversified flows.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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