Baku, Azerbaijan, Feb. 11
By Elena Kosolapova - Trend:
Standard & Poor's Ratings Services has revised its long- and short-term counterparty credit ratings on Kazakhstan-based Alliance Bank JSC to 'D/D' from 'CCC/C', the rating agency reported on Feb. 11.
At the same time, the agency lowered Kazakhstan national scale rating on the bank to 'D' from 'kzCCC+'.
S&P also lowered ratings on the bank's senior unsecured debt to 'CC' from 'CCC' and the ratings on the subordinated debt to 'C' from 'CCC'.
"We understand that Alliance Bank failed to pay holders of its "recovery notes," due on Dec. 26, 2013. According to our definition, this means the bank is in default, leading to a rating that is 'D' (default) or 'SD' (selective default)," S&P said.
Additionally, due to this nonpayment, the bank breached regulatory liquidity requirements, which appears to constitute a covenant breach under Condition 11 (l) of the documentation for the par notes and discount notes, two further classes of senior unsecured debt.
The next coupon payment date is March 25, 2014, for the bank's discount Kazakhstani tenge and U.S. dollar notes, due in 2017; the senior par tenge and U.S. dollar notes, due 2020; and the subordinated tenge notes, due in 2030. However, on Jan. 31, 2014, the bank announced the Board of Directors' decision to start restructuring the bank.
"In our view, a restructuring would likely result in the noteholders taking substantial haircuts against the principal and accrued coupon amounts," the agency said.
S&P therefore considers that the nonpayment will be a general default and that Alliance Bank will fail to pay all, or substantially all, of its obligations as they come due. The agency have therefore lowered the ratings to 'D'.
"In accordance with our criteria, we also lowered our ratings on the notes to reflect our expectation that nonpayment is a virtual certainty. In the case of the subordinated notes, we also consider their lower relative seniority and our expectation of lower ultimate recovery. If Alliance Bank fails to pay the coupons due on March 25, we would lower the ratings on these instruments to 'D', unless the noteholders have accepted a purchase offer at below par and we have already lowered the ratings to 'D'," the agency said.
Even if, contrary to management's currently stated intent, the bank paid the March coupons, S&P would likely regard the planned bond restructuring as "distressed" and tantamount to a default. This is based on the understanding that the investors would receive less value than the original promise and because, in S&P view, there is a realistic possibility of a conventional default, absent the restructuring.
S&P has revised assessment of Alliance Bank's stand-alone credit profile (SACP) to 'cc' from 'ccc', reflecting its expectation that default is a virtual certainty. The agency has revised its evaluation of the bank's business position to "weak" from "moderate," due to the likelihood of franchise damage arising from the default and the associated business instability. Moreover the agency has revised its evaluation of the bank's liquidity to "very weak" from "adequate," reflecting its view that the planned restructuring will have weakened the confidence of investors, leading to the bank having noticeably weaker liquidity than other Kazakh banks.
The other factors within our SACP assessment remain unchanged. After the bond restructuring S&P would review the ratings on the bank based on its new capital structure and business and financial profiles.
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