Clare Nuttall in Almaty -

Kazakhstan's BTA Bank has laid out four restructuring options to its creditors, including a worse-than-expected 82.25% haircut for a cash buyback. Once a final restructuring plan has been agreed with shareholders, the bank told reporters on Thursday, September 10 that a decision would be made on BTA's possible sale to Russia's Sberbank.

The restructuring plan is a key step for Kazakhstan's markets, which have been in a state of suspended animation while the fate of the country's biggest bank is decided. Some feared the bank would be closed altogether, causing another internal shock to the already battered financial sector.

The bank's development plan for 2009-2014, published on its website on September 7, is based on the assumptions that the KZT683bn ($4.5bn) it received from Kazakhstan's state investment fund Samruk Kazyna, which stepped in to prevent BTA's collapse in February, will be converted to equity. It also assumes the creation of equity from a debt restructuring of $8.0bn.

The four options, drawn up on the basis of BTA's business plan and a final report from the auditors KPMG, are as follows:

Option 1 is a cash buyback at a discount of 82.25%, with maximum cash of $1bn available. This is estimated to need the participation of 55% of the creditor base.

Option 2 is a medium-term (seven-year ) rollover option, at a discount of 60% and at reduced interest rates. Sustainable amount of participation is estimated at 15% of the creditor base.

Option 3 is a 15-year subordinated roll-over option (including 10 years' grace) at no discount and at reduced interest rates. Sustainable amount of participation is estimated at 10% of the creditor base.

Option 4 is an equity conversion at a discount of 80%. This is estimated to require participation from around 20% of the creditor base.

BTA's chairman, Anvar Saidenov, told a press briefing that the bank and its advisers have been in constant discussions with the creditors' steering committee since early September. Kazakhstan's financial regulator has asked that BTA agrees with the committee on a memorandum of understanding as a basis for its restructuring and recapitalisation plan, and submits it to the regulator for approval by September 18. "The restructuring options presented by BTA Bank were broadly in line with market expectations, though perhaps with haircuts worse than some creditors had hoped for," says Jason Hurwitz, director of financial sector research at Visor Capital. "There are a lot of tricky things to consider, making it virtually impossible to please all parties involved. While we may still even end up with a situation where no agreement is reached before September 18, we remain hopeful that such an outcome can be avoided, as it is probably not in anyone's best interest."

Saidenov confirmed that a decision will be made on BTA's potential sale to Russia's Sberbank once the final restructuring plan has been agreed. A timely decision on BTA's future would increase the chances of that sale going ahead. "The more the restructuring drags on, the more the chances of the Sberbank deal happening decrease, because the more value at BTA is being destroyed," says Milena Ivanova-Venturini, director of equity research, banking and finance, Central Asia, at Renaissance Capital.

Saidenov also shed more light on the question of whether trade finance will be included in the restructuring. There are several representatives of BTA's trade finance creditors on the steering committee, among them KfW (representing its subsidiaries DEG and KfW IPEX-Bank, Export Import Bank of the United States and Mediabank of Italy). "Trade finance representatives have not been satisfied from the start about trade finance being included in the general restructuring plan. They are not willing to discuss any discount or debt amortisation, only a prolongation of the repayment period," Saidenov told journalists. "At the same time, the bank realises its responsibility to fulfill obligations including trade finance and will try to come to a final decision with the creditors committee that will satisfy trade finance creditors, the bank and the creditors committee as a whole."

The possibility that BTA could restructure its trade finance had caused uproar in the international financial community. There are also fears it would make it difficult or impossible for other Kazakhstan-based banks to raise trade finance in future. On September 7, two industry organisations - the Bankers' Association for Finance and Trade (BAFT) and the International Financial Services Association - wrote personally to President Nursultan Nazarbayev, appealing to him not to allow BTA's trade finance obligations to be restructured.

Looking to the future

In addition to the restructuring options, BTA's management and their advisers also outlined future business plan for the bank. According to the presentation, BTA plans to focus on its Kazakh operations, particularly the retail and small and medium-sized business segments. "BTA's banking franchise (in particular, retail and SME) is fundamentally a healthy business that will perform efficiently now that the management and key shareholders of the bank have changed and deficient legacy lending practices have been abandoned. Retail and SME blocs have retained the core infrastructure and personnel despite the recent financial turmoil," the presentation lays out.

The bank also anticipates a scaling down of its operations, and some staff cuts are planned. Ivanova-Venturini says the strategy changes BTA plans aren't huge. "Retail is due to account for 20% of BTA's loan book by 2014, but will account for only 12% of new loans. It's not a groundbreaking change of direction - we expect BTA will continue to be primarily a corporate lender," she says. "The other banks are also talking about SMEs, but it depends on how you define SMEs. I am not convinced there is a real SME sector in Kazakhstan. There are no earth-shattering new strategies."

Of BTA's foreign subsidiaries, the bank plans to continue its legal battle to regain control over BTA Russia and BTA Ukraine. It will also keep its subsidiaries in Belarus, Kyrgyzstan and the city of Kazan in the Republic of Tatarstan, Russia. However, BTA is planning an immediate sale of BTA Bank Armenia, and also plans to sell BTA Bank Georgia. The future of Sekerbank in Turkey is under review.

Most of its Kazakh subsidiaries will be retained within the BTA Group. However, the future of both Temirbank and BTA Ipoteka are under strategic review. London Almaty Insurance Co may also be sold in future.

Another central part of BTA's future strategy will be to recover as many of its assets as possible. The bank's loan portfolio "included a large number of dubious loans to non-transparent companies outside of Kazakhstan (including borrowers incorporated in a number of off-shore jurisdictions such as Panama, Cayman Islands and British Virgin Islands). Continuous investigations into suspected corporate governance abuses as many loans appear to be linked to former management," BTA's presentation said. "Almost the entire corporate loan portfolio of the bank had to be fully provisioned. The bank's trade finance portfolio is also largely composed of non-performing and dubious assets."

BTA has already successfully applied to the London High Court to freeze the assets of several former top managers. It is also working with law firm Lovells on asset recovery. According to Saidenov, it may be able to recover as much as KZT500bn ($3.3bn) from provisions for bad loans, over a period of several years. "In our management presentation, we estimate this amount could be KZT500bn," Saidenov told journalists. "By the nature of this process, progress is expected to be very slow. It will take years, because there are a number of legal procedures that have to be carried out. We are just at the beginning of this process."

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