BTA Bank has survived. At the end of May 2010, the Kazakh bank won 92% approval from creditors for a package of different debt restructuring options that will reduce its overall burden to $4.4bn from $11.4bn, with a new maturity profile running from eight to 20 years, while handing 18.5% of the bank's equity to creditors. All this was carried out while the bank remained fully operational, rather than entering into administration.
"Organising the restructuring with the participation of creditors while making sure that the bank will continue to operate, without having to resort to a full-state bailout or create a good bank/bad bank structure, is something that in our experience is unprecedented," says Eric Lalo, a managing director in the sovereign advisory team at Lazard, which worked on the deal alongside UBS. Lazard also advised on the Alliance Bank restructuring in Kazakhstan that was proceeding simultaneously with BTA's efforts.
Anvar Saidenov, the former governor of the National Bank of Kazakhstan, became BTA's CEO in February 2009, after the Kazakh government had intervened in the bank. He toured branches around the country to brief staff and customers personally on the bank's situation.
"We made very great efforts to maintain the confidence of depositors and clients, and the majority of our clients understood the situation. As businesspeople, they took some precautions, they moved their savings to other banks, but many kept their current accounts with BTA and promised to move savings back to the bank when times were better," says Mr Saidenov. In the first quarter of 2010, the bank enjoyed a net household deposit inflow of $100m.
Sharing the burden
The BTA restructuring deal is one of the largest in an emerging market, and among the most complex. It represents a compromise between a full bailout and a full bankruptcy. In the UK, the government recapitalised Royal Bank of Scotland to avoid the bank's creditors facing any losses. In Iceland, the government put the international assets and liabilities of three troubled banks into administration, leaving foreign creditors to sell the legacy assets and recover whatever money they could.
In Kazakhstan's case, former UBS investment banker and Brevan Howard portfolio manager Marcia Favale-Tarter, who advised the Kazakh prime minister, emphasises that the approach was one of burden sharing between private creditors and the Kazakh sovereign wealth fund Samruk-Kazyna. This fund took over the bank in February 2009, and ultimately injected $1.4bn in equity, as well as providing just under $1.8bn in deposits and $4.5bn in bond guarantees and its own paper as repo collateral.
The restructuring deal, due for financial close in September 2010, will leave Samruk-Kazyna with a stake of 81.5%, less small residual allocations to previous minority shareholders. The deal is designed to help the bank reach the minimum capital that it will require to meet capital adequacy ratios - about $1.35bn. This gives some idea of the initial cost borne by Samruk-Kazyna to save the bank, although the stated intention is for the fund to sell its stake by the end of 2012 if a suitable buyer can be found, presumably at a higher valuation.
Diverse creditors
Those who advised BTA and the Kazakh government on the deal suggest that it could be a model for future bank rescues, for example among the Spanish cajas. But the transaction was not without controversy. Some creditors expressed concern when White & Case, the law firm advising BTA, was called on by the Kazakh authorities to help draft new bank restructuring legislation that would govern the negotiations.
Francis Fitzherbert-Brockholes, partner at White & Case, emphasises that the new law passed in August 2009 ultimately benefited creditors as well as the bank. Kazakh legislation was brought into line with UN Commission on International Trade Law agreements, providing the restructuring deal with protection against dissenting creditors - courts in the US, UK and Ukraine have so far recognised the deal. The new law also allowed a cram-down once the 75% creditor approval threshold was crossed. Without these changes, BTA would have needed to obtain 100% creditor consent, or risk facing litigating creditors who could have blocked payments to other bondholders and to correspondent banking accounts.
The bank produced a range of options to win approval from different groups of creditors, in negotiation with a creditor steering committee. Originally, four separate creditor committees had led to inertia, and Lazard encouraged creditors to form a single committee. Here, distressed debt hedge funds which had bought Eurobonds at a substantial discount rubbed shoulders with relationship banks that had lent at par, a number of government-backed development finance institutions, and trade finance creditors who did not expect to be included in the restructuring at all.
"To find all of them at one table is very unusual, it has not been seen before to that magnitude. But given the situation, participants decided to work together, and the different ideas in the steering committee led the way to a very diversified restructuring package," says Jan Klasen, head of the special assets group responsible for handling distressed situations at German state-owned development bank KfW, who sat on the creditors' steering committee.
The largest slice of treated debt, Senior Package 1, covering about $9bn of claims, gives investors 11% of their claims in cash, an eight-year senior bond at a discount of 73% to the claim, a 15-year subordinated bond for 6% of the claim, and a total equity allocation of 12.55%. Ian Jack, a partner at Baker & McKenzie who provided the legal advice to the creditor committee, says those negotiating over BTA were watching the process at Alliance Bank, which was a few months further advanced.
One of the key lessons was to allocate certain types of investors to each package, rather than allowing investors extensive choice between packages. Alliance creditors had been allowed a more open choice, but this left investors with too much uncertainty about how the restructured securities would eventually be allocated.
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Anvar Saidenov, the former governor of the National Bank of Kazakhstan, now BTA's CEO
Trade finance controversy
The treatment of more than $3bn in trade finance owed by BTA to both private creditors and state-backed export credit agencies was among the most contentious aspects. In theory, trade finance transactions are collateralised, short term and self-liquidating, and are rarely included in restructuring deals. In the case of BTA, many apparent trade finance transactions were not performing, and no underlying collateral was available.
"After a long session of explanations, everyone finally understood that it was an issue of inter-creditor equity. For the bondholders, there was no way that the trade finance creditors could walk away at par, while the bondholders and other financial creditors would be the only ones to take a big hit," says Mr Lalo.
About $700m was excluded from taking a haircut, in return for the creditors participating in a two-year Revolving Committed Trade Finance Facility, which will be managed by an agent of the creditors themselves and will allow BTA to maintain its trade finance activities. However, around another $2.35bn was restructured, mostly via Senior Package 1. This prompted widespread protest, culminating in a letter to the Kazakh authorities in October 2009 from 15 banking associations worldwide.
In response, BTA eased the haircut for trade finance, but retained a distinction between what it termed 'true' trade finance, based on individual import or export transactions, and 'artificial' trade finance - long-term trade finance facilities provided by foreign banks to BTA that were not tied to specific transactions. The latter was given less favourable treatment. Some trade finance debt was also written off altogether, on the grounds that it was fraudulent - a decision that has clearly not convinced all the creditors.
"The argument of fraud allegations helped the bank to reduce the amount of debt to be included in the restructuring, as so-called fraudulent trade finance was forced to take a 100% haircut. The Kazakhs have definitely felt the impact, people are not very interested to do trade finance with them right now, and I think other debtors will be cautious about following the path that BTA has taken," says one of the bank's trade finance creditors.
Shareholder dispute
In fact, allegations of fraud remain central to the ultimate fate of BTA Bank. After Samruk-Kazyna took over BTA, the bank's new management accused former controlling shareholder and chairman Mukhtar Ablyazov of defrauding the bank of substantial sums of money. BTA's lawyers have filed claims alleging lending to offshore shell companies of which Mr Ablyazov was the beneficial owner, and reassigning loans and assets from the bank to offshore companies on terms that were unfavourable to BTA.
Hogan Lovells, the law firm undertaking the asset recovery process for BTA, has begun proceedings in the UK and elsewhere against Mr Ablyazov and other former managers of the bank, claiming almost $2bn to date, as well as pursuing recovery actions against individual non-resident debtors who have defaulted on large loans. Mr Saidenov says the total lending to non-resident entities, mostly with assets in Russia but often through companies based in the UK or British Virgin Islands, was about $6bn, for which the bank has now provisioned about 90%.
In May 2010, the Russian authorities arrested senior executives at commercial real estate developer Eurasia Logistics, alleging that they helped Mr Ablyazov to defraud BTA via fake lending transactions. The Russian Interior Ministry charged Mr Ablyazov himself in absentia at the end of June, accusing him of a $5bn fraud against BTA. Mr Ablyazov was chairman of Eurasia Logistics until 2008, but says he is no longer involved with the company, and that all loans made to it were legitimate.
He vigorously denies all the fraud allegations, asking: "Why would I steal money from a bank that I owned?" Instead, his lawyers have filed a defence in the UK High Court alleging that senior members of the Kazakh government were pursuing a broader strategy of increasing their personal control over the economy, and had sought to seize his bank ever since he resumed ownership in 2005.
Mr Ablyazov originally bought the bank at privatisation in 1998, a month before being invited to join the government as energy minister, after successfully restructuring the national electricity company. But he subsequently fell out with Kazakh president Nursultan Nazarbayev, and was a founding member of the opposition party Democratic Choice of Kazakhstan (DCK) in 2001, which provoked a strong response from the government.
Mr Ablyazov was prosecuted for alleged abuse of office in July 2002, and sentenced to six years in prison. He maintains that the case against him was fabricated for political reasons. Among the other founding members of DCK, Galymzhan Zhakiyanov was imprisoned on abuse of office charges until 2004, but Nurzhan Subkhanberdin remains in control of more than 30% of shares in the country's largest bank, Kazkommertsbank, while Kairat Kelimbetov is now the CEO of Samruk-Kazyna.
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Mukhtar Ablyazov, former controlling shareholder and chairman of BTA Bank, denies all allegations of fraud
Early release
At the time of his arrest in 2002, Mr Ablyazov handed over his stake in BTA to his business partner, Yerzhan Tatishev. After heavy criticism of the Kazakh government from the European parliament and human rights organisations, Mr Ablyazov was released in May 2003, and moved to Moscow, where he built up diversified real estate and infrastructure investments.
When Mr Tatishev died in 2005, his widow apparently transferred her stake in BTA back to Mr Ablyazov. He says his plan was to take the bank public, and potentially to transfer its headquarters out of Kazakhstan, beyond the reach of the government.
Ultimately, however, he says the credit crunch delayed his listing plans, and he claims that the government used the cover of the financial crisis to demand a 63% stake in November 2008, which he bargained down to 25%. Then, in January 2009, he alleges that the government deliberately spread rumours of BTA's impending collapse, causing a freeze of interbank lending, and also shut BTA out of the central bank's repo facility. The regulators then allegedly demanded an immediate hike in provisions from 8.5% to 24%, forcing the bank into the arms of Samruk-Kazyna.
Mr Ablyazov has lodged claims totalling $3bn against the Kazakh government under UN investment protection treaties, alleging that the bank was taken from him illegally. The Kazakh authorities maintain that the takeover of BTA was essential to prevent the bank's collapse, which would have threatened the stability of the country's financial system.
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Asset recovery
In contrast to Mr Ablyazov, Roman Solodchenko, a former banker for the World Bank and ING who became BTA's chief financial officer in 2005 and CEO from 2007, did not participate in politics. He remained part of BTA's management for a month after Samruk-Kazyna's takeover, before resigning in March 2009.
"I continued to work at the bank after Samruk-Kazyna arrived because I wanted to deal with the creditors and the bank's international activity, to try to avoid creditors accelerating the bank's debts. But I felt that the new management had no intention whatsoever to talk to creditors - it took them three months to appoint restructuring advisors. And prosecutors started investigating me, so I could see the way things were going," says Mr Solodchenko.
According to BTA's advisors, the delay in commencing restructuring negotiations resulted from the new management's difficulty in getting to grips with the bank's opaque balance sheet, which required a fresh audit of the 2008 results.
Mr Solodchenko says that the bank had positioned itself to cope with the liquidity squeeze from August 2007, when external wholesale markets first closed to Kazakh borrowers. BTA hiked lending rates and wound down its loan portfolio to meet $2bn in redemptions to the end of 2007, and serviced a further $1bn in 2008.
Mr Solodchenko says about 35% of the bank's $20bn assets were in Russia, but maintains that these were in high-quality, well-performing investments including logistics parks, infrastructure, cigarette factories and coal production. In fact, Russian banks were sufficiently confident in the asset quality that they refinanced some of these projects in 2008, providing BTA with liquidity for the coming year.
So how does one explain the 96% provisioning on the non-Kazakh portfolio today? BTA's new management alleges that loans were made to economically unproductive shell companies ultimately owned by Mr Ablyazov, as a way of funnelling money out of the bank. Many loans were made with inadequate documentation and security collateral that could be realised in the event of delinquency. Mr Solodchenko, who is also a defendant in BTA's case against the former management of the bank, claims that BTA's debtors simply melted away opportunistically after the Samruk-Kazyna takeover, believing the bank was on the brink of destruction and would not pursue them.
Asset recovery
The two narratives are not mutually exclusive. The complex ownership structure of BTA and the transfer of its assets outside Kazakhstan are consistent with Mr Ablyazov's fears that the government would try to seize the bank. His fight with the Kazakh authorities forms the basis of his claims that his shareholding in the bank was seized unlawfully, but it provides little consolation to creditors who lent the bank more than $11bn, and have accepted a haircut of $7bn. Mr Ablyazov says he contacted the creditor committee offering to present his version of events, but received no response.
But the two competing narratives over the bank's fate certainly influenced the conduct of creditors during the restructuring negotiations. Creditors requested two seats on the board, and required minority shareholder protection written into the agreement. Above all, it became essential for BTA to offer recovery notes - securities allowing creditors to share 50:50 with Samruk-Kazyna in any recoveries on the provisioned loan portfolio above its current book value.
"Questions about what happened to the assets are highly relevant, because asset loss was what drove the restructuring deal. If the assets are gone, they are gone. But no one wanted to agree to a large write-off on day one and then to discover later that most of the assets had been recovered, so creditors wanted a formula that allowed them to share in the recoveries," says Baker & McKenzie's Mr Jack.
The recovery notes also effectively make creditors a party to the litigation against BTA debtors and Mr Ablyazov himself, which could cut across his strategy of presenting the dispute as one between himself and the Kazakh government. A UK court placed an order to freeze Mr Ablyazov's assets in August 2009, and his appeal against this freeze was rejected in November 2009. Significantly, however, the court agreed that Mr Ablyazov must disclose his assets only to Hogan Lovells - the law firm is not allowed to share that information with its client, the new management of BTA.
In theory, an independent valuation will be made of the assets recovered - possibly by Deloitte, which provided valuation services to the creditors' committee during the restructuring negotiations. But creditors will not have direct access to information about the recovery process, and Mr Solodchenko suggests that it will be very difficult to verify whether they ever receive their promised share of the Russian assets in particular.
Government exit
While Mr Ablyazov continues to allege a deliberate government seizure of his bank, Mr Saidenov is adamant that Samruk-Kazyna intends to exit BTA. The restructuring agreement obliges the listing of global depository receipts within six months of completion, as a step to eventual reprivatisation. The difficulty in finding a buyer is that some of BTA's overseas subsidiaries are minority owned by the bank, and Mr Ablyazov still controls stakes in these units. Mr Ablyazov says he hopes to continue developing those subsidiaries, but the Kazakh government is attempting to seize his shares or hand them over to creditors.
According to Mr Saidenov, Russia and Ukraine are the most troubled subsidiaries. BTA owns just 22.3% of the Russian subsidiary, where controlling shareholders voted to change the name to AMT Bank in December 2009. But BTA resumed 49% control over the Ukrainian subsidiary in April 2010, when a court there ruled that the apparent reduction in its stake to 9.9% - just days before Samruk-Kazyna took over BTA in February 2009 - was falsified. Nonetheless, to date only Russia's state-owned Sberbank has expressed an interest in buying BTA as a whole, and will consider making an offer after the completion of the restructuring process in September 2010.
"Our partners, shareholders in the Armenian and Georgian subsidiaries, have expressed an interest in buying out those subsidiaries, but there are no formal offers yet, and we would not sell at a loss. In Armenia, Georgia, Belarus and Sekerbank [in Turkey] there are no major legal conflicts or problems, and these subsidiaries are in general profitable," says Mr Saidenov.
In any event, he says the future strategy of the bank is to focus on the parts of the portfolio that are in better health - the domestic retail and small and mid-sized enterprises. In pursuit of this objective, Mr Saidenov wants to reduce the share of corporate loans in the portfolio to 50% over three to four years, from about 80% at present. The BTA that emerges from this crisis will be a fundamentally different bank.
