Clare Nuttall in Almaty and Ben Aris in Moscow -

Investors in Kazakhstan's once mighty BTA Bank are upset. After the bank nearly collapsed during the financial crisis and the state took it over, the government made every effort to engage bond and shareholders and run a transparent bailout process. However, some investors claim that as time has passed, the rescue effort has become opaque as the assets become a pawn in political power struggles.

A restructuring deal was drawn up following the state takeover, but analysts say the deal was based on overly-optimistic forecasts for BTA's future performance, and assumptions that BTA would be able to recover its lost assets more quickly and easily than has proved the case - predictions that are coming home to roost now. BTA Bank has now announced plans for a new debt restructuring deal after shareholders rejected the bank's latest restructuring proposals at a meeting on January 26.

Speaking to journalists in Almaty on January 27, the chairman of BTA's board of directors, Anvar Saidenov, said he couldn't guarantee success in the talks, but expected an agreement to be reached. He declined to comment on how much debt BTA wants to restructure.

Poor management

"The process got off to a good start," says one major bondholder who didn't want to be named given the sensitivity of the situation, "but since the original restructuring - which the Wall Street Journal called a model restructuring - things have gotten worse."

At the time of the takeover, the state wrote off $12.7bn worth of claims, injected $1.5bn worth of cash and promised to pay out $4.5bn to investors in 15 years' time as a bond. Depositors at the bank also had another $5bn in claims.

One of the main bones of contention is that the bank was supposed to cut its high costs while the state was supposed to offer the bank cheap credit to help it grow out of its hole - neither of which has happened, claims bne's source. At the end of last year, BTA had a cost/income ratio of 8.9%, less than a third that of its two main rivals Kazkommertsbank (33.9%) and Halyk (32.7%). Moreover, consultancy fees exceed staff costs, already the highest in the sector, according to a report by Troika Dialog.

Another problem is that almost no progress has been made in recovering the bank's debts. At the time of the takeover, there was some $12bn-14bn in debt owed to it, but after two years only $150m has been recovered, which cost $300m in legal fees to organise, according to investors. This is despite the fact that BTA has launched claims to recover around $4bn through the British court system alone. Troika Dialog estimates the bad debt recovery ratio at only 20%, but admits that these obligations could "evaporate". "Billions of dollars are at stake, yet the process is entirely opaque," says bne's source. "When you ask, they say they can't give the details, as the process is 'confidential'."

But the most egregious problem, say sources, is the state siphoning off the bank's profits, which will ruin the bank unless something is done about it. "In 2011, the bank paid $400m to the state in interest. This is very expensive money. The bonds issued to cover the $4.5bn payout earn 4%, but they can be repo'ed at the National Bank at 7.5%. But Kazakhstan's sovereign wealth fund Samruk-Kazyna guarantees the National Bank and BTA has to pay 2% for this guarantee," says bne's source. "The upshot is BTA earns 4% on the bonds, but has to pay the state 9% for money backed by these bonds. It's a bad deal, as the claimant on the bonds, Samruk-Kazyna, is also the guarantor. In effect the state is taking money out of the bank, not trying to restructure it."

Troika Dialog makes the same point, albeit less directly: one of the uncertainties for the bank's future is whether "the state will stop draining the bank's profitability," which has turned the bank's net interest margin negative. "The elimination of the negative carry swap is critical for the bank's operating sustainability," says Ainur Medeubayeva, a bank analyst with Troika, in a report.

What investors now fear is the bank is being run into the ground as the surviving assets are bled out of the bank before an eventual default on all BTA's obligations or liquidation of what's left. "The state needs to do the right thing and either bail out the bank and reimburse investors, or at least put a realistic restructuring process in place," says bne's source.

Difficult debt negotiations

All these problems seem to be driving the parties towards a crunch point. Although shareholders voted down all the proposals on the agenda at the general shareholders' meeting (GSM) on January 26, BTA countered that participants at the meeting were not representative of the bank's shareholders.

A statement issued by BTA says that the holders of global depositary receipts (GDRs) who voted at the meeting represented only 17.97% of the GDRs outstanding, or 2.7% of the bank's issued and outstanding common shares. BTA's majority shareholder, Samruk-Kazyna, was obligated to vote in favour of the resolutions only if at least two-thirds of GDRs voting at the meeting approved them. "In this regard, the bank believes that this voting was not representative of GDR holders as a whole," said BTA's statement. "These results of voting on the GSM are certainly not an impediment to achieving restructuring and the bank will continue to take all the necessary steps."

Saidenov told journalists the talks that started January 23 aimed at agreeing a new restructuring deal were continuing and he was optimistic that agreement could be reached. BTA plans to form a new steering committee within the next few days.

Until the onset of the financial crisis, BTA was Kazakhstan's largest bank by assets, with subsidiaries in countries across the former Soviet Union. However, when Kazakhstan's real estate sector imploded and cheap international credit dried up, the bank came close to collapse and was nationalised in February 2009.

BTA managers and the Kazakh government say a large part of the bank's problems were due to fraudulent transactions and embezzlement by its former management, headed by oligarch Mukhtar Ablyazov. Ablyazov has denied the charges, saying they are politically motivated.

Despite the original restructuring deal, which was initially hailed as a success, BTA's financial problems have accelerated in recent months, and the bank has also seen a string of departures among its top managers.

On January 18, BTA failed to make a $166m interest payment on a dollar-denominated bond due to mature in 2018. BTA had already asked for a grace period and warned that it might have to skip the payment due to its urgent need for capital.

A second restructuring deal with creditors is expected to also require another cash injection from Samruk-Kazyna. In autumn 2011, the then Samruk-Kazyna head Timur Kulibayev (who also owns Halyk Bank, BTA's main rival, and Visor Capital, which is advising on the restructuring) indicated that additional funding would be available if needed. Kulibayev has since been sacked, but there is speculation that his predecessor at Samruk-Kazyna, Kairat Kelimbetov, has been promoted to Deputy Prime Minister partly with a view to tackling BTA.

Kelimbetov's appointment "indicates, in our view that [Prime Minister] Karim Massimov wants to bring in people with experience of the 2009-2010 banking sector restructuring process," Visor Capital wrote in a research note following the January 21 government reshuffle.

Visor Capital analyst Renat Syzdykov says that while he does not expect the talks to fail, "it will be difficult for BTA to negotiate a deal with its creditors, who are much cleverer today than they were the first time round"."I expect that additional funding from BTA's main shareholder Samruk-Kazyna discussed will be part of the negotiations," Syzdykov told bne. "I don't think creditors will agree to a deal unless they can be sure Samruk-Kazyna will support the bank. Haircuts for creditors could be high, as BTA needs a lot of capital, and losses are likely to be shared between creditors and Samruk-Kazyna."