The reappointment of Karim Massimov as prime minister of Kazakhstan in April 2011, following the re-election of president Nursultan Nazarbayev, should allow for policy continuity in the country in 2011. In particular, Mr Massimov was one of the architects of the banking sector rescue over 2008 to 2009, as well as a steady advocate for further economic reform.
So too was Kairat Kelimbetov, the former chief executive of the sovereign wealth fund and state holding company Samruk-Kazyna, which directly owns stakes in 43 major companies and controls many others through subsidiary investment funds. His post-election promotion to become economy minister may also provide an indication of the new government's policy direction. In his final months at the helm of Samruk-Kazyna, Mr Kelimbetov outlined ambitious plans to sell stakes in more than 100 companies in a bid to drive a more dynamic economy and stimulate local capital markets.
Mr Kelimbetov laid the groundwork for the initial public offerings (IPOs), with Samruk-Kazyna assessing the credentials for about 40 potential privatisation agents and equity offering bookrunners, together with possible legal advisors. Investment banks active in Kazakhstan certainly anticipate a growth in business, after three tough years in which slumping valuations and very limited access to international markets stymied primary issuance or merger and acquisition activity.
Foreign imports
Blair Pollock epitomises this drive for new business. A UK banker with prior experience in Kazakh capital markets, he was hired by leading Russian brokerage Troika Dialog in January 2011 to become the new chief executive of its Kazakh operations, signalling a step-up in business for a company that first established a presence in the country before the financial crisis.
“The plan now is very much to move ahead and take advantage of a major uptick in business, because the environment here is changing rapidly. Kazakhstan has come out of the crisis in very good shape, having weathered the storms far better than anyone expected, in terms of putting in positive economic growth in 2009 and 2010,” says Mr Pollock.
Similarly, Angelo Morganti took over the Kazakhstan operations for another leading Russian investment bank, Renaissance Capital, in January 2009, just weeks before Samruk-Kazyna had to take control of two of the country’s top four banks, BTA and Alliance. Renaissance is the only foreign bank with an on-the-ground research team in Kazakhstan and Mr Morganti expects to hire at least two more investment bankers in the coming months.
“Valuations are definitely looking better because Kazakhstan is a country that is driven by commodities, and oil, natural gas and metals prices are all increasing. Also, the resolution and completion of debt restructuring in the banking sector last year has helped the country’s image among investors,” says Mr Morganti.
What to list?
With so many companies to choose from, deciding where to start is a challenge in itself. One obvious contender would be KazMunaiGas Exploration Production (KMG EP), the production arm of the country’s largest natural gas company. While parent company KMG, which is fully owned by Samruk-Kazyna, holds 58% of the shares in KMG EP, just over 34% are listed as shares on the Kazakhstan Stock Exchange (KASE) and as Global Depository Receipts (GDRs) on the London Stock Exchange. Consequently, selling down a further stake in the company would be relatively straightforward.
“For the time being, investors see Kazakhstan as a natural resources country, so the easiest [option] would be to sell a company that operates in this sector,” says one investment banker.
But with oil prices soaring above $100 per barrel due to instability in north Africa, Kazakhstan's government is not under financial pressure to sell. Instead, the choice of company may depend on the government’s stated aims of deepening local capital markets, improving corporate governance and strategy in state-owned companies, and encouraging a share-owning culture among the Kazakh population.
People's IPOs
With this set of priorities in mind, Mr Nazarbayev has spoken of “people’s IPOs” targeted to achieve broad shareholding in the local market. This approach may indicate that the government would find it easier to IPO a company that is currently unlisted, to avoid creating an arbitrage situation for foreign investors.
That still leaves plenty of room for manoeuvre. Mr Pollock says Kazpost, for example, would face the same questions as any national postal services, such as the expenditure obligations associated with maintaining access to its services in remote areas. He believes utilities companies such as the electricity grid KEGOC would attract investors with predictable cash flows, systemic importance and a market where demand for key services such as electricity is rapidly growing. But another investment banker points out that the regulated nature of the utilities sector in terms of pricing and competition raises uncertainty for investors.
“You need to understand the regulatory framework and potential risks, and investors will have to be comfortable with that. It would be the same with [the state-owned telecom company] KazTelecom, investors want to know if the competition environment will change,” he says.
Consequently, the least problematic candidates for the first round of IPOs might be the rail network Kazakh Temir Zholy, or KMG gas transit subsidiary KazTransOil. These are central to the Kazakh economy, have excellent prospects, especially given Kazakhstan’s growing role as a trading hub between Russia and China, and have a business model that is unlikely to alter significantly.
Where to list
The 'people’s IPO' approach may also influence the choice of where and how to list the companies selected. Most investment bankers believe that foreign or dual listing is essential to be able to place large stakes from Samruk-Kazyna’s holdings, given daily turnover of just $1m to $3m on the KASE.
Jose Luiz Gaviao, the head of investment banking for the leading local independent investment bank Visor Capital, says further market infrastructure reform is necessary to bolster liquidity. In particular, the KASE settles on a T+0 basis, rather than the more common international standard of T+3. This means that investors must pay for shares with cash up front, rather than having a three-day settlement period to transfer funds from other investments.
But foreign trading of Kazakh shares would perpetuate the problem of limited liquidity on the Kazakh market. Mr Pollock says the main reason international investors have been fairly inactive on the KASE is not technology or regulation, but simply that most listed companies are too small to allow active trading. There is also a desire to avoid the experience of voucher privatisation schemes in other parts of the former Soviet Union, where a few wealthy individuals persuaded retail investors to part company with vouchers for far less than they were worth.
Mr Gaviao says one alternative would be to sell preference shares to retail investors in the first instance. These would have less volatile prices and a steady coupon cash flow to avoid exposing first-time investors to excessive risks, and could then be converted into common equity at a later date. Even so, he believes that cross-border capital will be needed further down the line, given the sizable planned investment programmes in the Kazakh utilities and infrastructure sectors.
Local market
The market for direct retail distribution in Kazakhstan is comparatively small. There are only 4000 private accounts with local brokerages for a population of just under 16 million. But there is an obvious alternative.
Marcia Favale-Tarter, a former UBS investment banker who is a senior advisor to Mr Massimov and to Samruk-Kazyna, underlines the aim of further developing a Kazakh capital market. She mentions the possibility of distributing most of the offerings directly to local private pension funds to meet the goal of a wider and effective distribution.
In theory, distributing to pension funds would also avoid the risks associated with voucher privatisations. Since pension funds are regulated entities, it would be easier for the authorities to supervise shareholding behaviour after the IPOs.
About 7.95 million Kazakh employees make a mandatory contribution of 10% of their salaries into 14 private pension funds, of which four or five dominate the sector. The system has about $16bn under management, with monthly inflows estimated at around $200m. At present, funds are required by the regulator to invest 48% of their assets in government securities, but this could be lowered to create greater demand for new share offerings.
Moreover, the National Bank of Kazakhstan is now allowing a managed appreciation of the Kazakh tenge currency, which means local pension funds would hold a risky asset/liability mismatch if they invested abroad. In these circumstances, a first round of IPOs should be digestible on the local markets. And as more major companies are listed, trading volumes will increase, providing the depth for further issuance.
“This very well could be the start of the process of the KASE being a place for people to be happy to do more business,” says Peter Howes, a managing director at Samruk-Kazyna.
If the Kazakh government follows this approach, it is likely to influence the choice of investment banks to act as bookrunners on the offerings. So far, Kazpost has been flagged as the agent for retail share distribution of the People's IPOs, but it would make sense to award mandates to the brokerage arms of local banks such as Halyk or BTA, which also own some of the largest pension funds.
“BTA Securities is working actively on a number of public sector agency programmes, for example, the issuance of bonds by Almaty city, so BTA Securities is active in finding such opportunities, and we will definitely try to win other such opportunities as manager, agent or broker,” says Anvar Saidenov, the CEO of BTA Bank.
Banking exit
Cross-border capital is still likely to play a role, however, in helping Samruk-Kazyna exit its most recent investments – namely in the banks themselves, injected with capital at the height of the financial crisis in late 2008 and early 2009. The process is simplest for the two banks in which the fund took only minority stakes, namely Halyk and Kazkommertsbank.
Enjoying excess liquidity, in March 2011 Halyk bought back the 20% of common equity that had been held by Samruk-Kazyna since late 2008. A few weeks later, a senior manager at Kazkommertsbank announced that it was considering doing the same with the 21% of its equity issued to Samruk-Kazyna in late 2008.
However, the sovereign wealth fund retains majority stakes in BTA and Alliance banks, as well as the retail bank Temir, which was demerged from BTA in 2009. While the smaller Temir is an uncomplicated asset for potential buyers, the other two are probably too large for a local bank to purchase, and have troubled foreign (mostly Russian) loan books from which they are still seeking to recover funds lost to suspected fraud.
Both BTA and Alliance have listed GDRs on the Luxembourg Stock Exchange to provide liquidity to creditors whose debt was swapped into equity as part of restructuring deals signed in early 2010. But these banks are more likely to be sold to strategic bidders, rather than via further public share offerings. Mr Saidenov says BTA’s Luxembourg-listed GDRs are not trading actively, because investors who participated in the restructuring are awaiting a report by accountancy firm Deloitte on the process of loan recoveries.
Firm valuation
This report will help put a firmer valuation on BTA. In any case, Kaha Kiknavelidze, the chief investment officer of Rioni Capital, a hedge fund that focuses on eastern Europe and central Asia, says Alliance Bank looks the easier deal.
“BTA seems to be run to recover assets so that it can service the restructured debt, and I am not sure after that how much franchise it will have left. Alliance Bank seems more positive, but when you look at Halyk, Bank CenterCredit and ATF Bank, who are all active in the market, it is already very competitive,” he says.
Mr Saidenov acknowledges that the process of finding a strategic buyer for BTA is ongoing. Russia’s Sberbank made the only concrete approach in 2009, and is waiting to see BTA’s 2010 audited results. But its enthusiasm is thought to have waned – the bank is apparently considering a stand-alone bid for BTA’s stake in the successful Turkish bank Şekerbank.
There are still legal disputes with BTA’s previous owners over control of its Russian and Ukrainian subsidiaries, and the new management have also had to go to international arbitration to resolve the fate of its Kyrgyzstan subsidiary. A Kyrgyz court ordered the seizure of shares in BTA's Kyrgyzstan subsidiary in December 2009 following a dispute over a loan guarantee.
Within Kazakhstan, BTA, along with Kazkommertsbank, is still heavily exposed to the real-estate sector, which shows little sign of recovering to the pre-crisis boom levels. Instead, one investment banker believes that real-estate valuations will in future more closely reflect income growth in Kazakhstan.
However, Mr Saidenov says there are positive signs in terms of renewed demand for mortgages, express and consumer loans in the domestic market. Moreover, a programme to offer borrowers a grace period, interest rate reductions and maturity extensions in return for a 10% principal down payment has yielded positive results. Most loans treated this way are now performing, allowing a reduction in provisions.
“Our general task now is to optimise our organisational structure, personnel and costs within the bank. This year is very important for us to prove after the restructuring that the bank can reach operational profit from regular banking activity. That is a huge challenge, comparable to the restructuring negotiations themselves,” says Mr Saidenov.
