S&P downgrades Alliance Bank (Kazakhstan) ratings

/Standard & Poor's, Frankfurt, February 11, 14, Standard & Poor's English translation, KASE headline/ - Standard & Poor's Ratings Services said today it had revised its long- and short-term counterparty credit ratings on Kazakhstan-based Alliance Bank JSC to 'D/D' from 'CCC/C'. At the same time, we lowered our Kazakhstan national scale rating on the bank to 'D' from 'kzCCC+'. We also lowered our 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). 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 (KZT) and U.S. dollar notes, due in 2017; the senior par KZT and U.S. dollar notes, due 2020; and the subordinated KZT 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. We therefore consider 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. We 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'. Even if, contrary to management's currently stated intent, the bank paid the March coupons, we would likely regard the planned bond restructuring as "distressed" and tantamount to a default. This is based on our understanding that the investors would receive less value than the original promise and because, in our view, there is a realistic possibility of a conventional default, absent the restructuring. In December 2013, Kazakh businessman Bulat Utemuratov reached a binding agreement with Samruk-Kazyna to purchase 16% of Alliance Bank's preferred and common shares. After the transaction, Samruk-Kazyna would retain its majority stake of 51% in the bank. The restructuring follows the bank's announcement of an expected capital shortfall of KZT152.7 billion at year-end 2013, due to significant additional provisions late last year and the de- recognition of a deferred tax asset. The bank is planning to complete restructuring negotiations by June 30, 2014. This restructuring comes five years after the first debt restructuring and recapitalization plan that Alliance agreed with its creditors at the request of the central bank. We have revised our assessment of Alliance Bank's stand-alone credit profile (SACP) to 'cc' from 'ccc', reflecting our expectation that default is a virtual certainty. Within the assessment, we have revised our 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; and - Liquidity to "very weak" from "adequate," reflecting our view that the planned restructuring will have weakened the confidence of investors, leading to the bank having noticeably weaker liquidity than other Kazakh banks. That said, we understand that the bank is currently honoring its obligations to depositors. The other factors within our SACP assessment remain unchanged. After the bond restructuring we would review the ratings on the bank based on its new capital structure and business and financial profiles. Primary Credit Analyst: Annette Ess: Frankfurt, (49) 69-33-999-157; annette.ess@standardandpoors.com Secondary Contact: Kirill Lukashuk, Moscow, (495) 783-4061; kirill.lukashuk@standardandpoors.com [2014-02-11]