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Buysiders and CDS sellers are worried that some of the deliverables approved for the BTA credit-event auction could fail know-your-client [KYC] tests or distort the auction process, Debtwire reports.
“People are raising the issue of loans to third parties that were guaranteed by BTA, and are asking whether they will have the same value as other facilities,” said one structured credit banker. “Everyone is doing their own research [on those third parties] and it’s difficult to say what will happen.”
The International Swaps and Derivatives Association (ISDA) determinations committee ruled in April that a failure-to-pay credit event had occurred in relation to BTA, or Bank TuranAlem. This was the first ISDA ruling in Emerging Europe. It has since approved 25 deliverables for the upcoming credit-event auction. The Kazakhstani bank is working with advisors Goldman Sachs, UBS and White & Case on a restructuring plan, as reported.
At issue are four USD 50m loans granted by Credit Suisse International in 2005 and 2006, said the structured credit banker and two fund managers. The loans were to companies called Ergen Trading, Mintex Trading, Berment Ventures and United Clearing and Processing Company. All four have a guarantee from Bank Turanalem in favour of Credit Suisse, according to the ISDA deliverables list.
Although BTA’s new management has admitted being unable to track down documents and counterparties for many corporate loans, there is no suggestion that the Credit Suisse loans were improperly documented. But the uncertainty surrounding them may depress bids at the credit-event auction, said one of the fund managers and a source familiar with the situation.
“The loans tick all the boxes for inclusion but some accounts could encounter KYC issues if they are asked to take delivery of them,” said the fund manager. In previous credit-event auctions there have not been issues with deliverability of plain-vanilla bonds and loans, but these facilities are more unusual, he said.
The USD 200m of loans constitute a small fraction of the USD 5.75bn of deliverables included on the ISDA list. Credit-default swap buyers and sellers are disintermediated during the auction process, however, so anyone placing a physical settlement request and taking possession of a deliverable could receive a portion of those loans, said the second fund manager and the source familiar with the situation.
Taking part in the auction, either by making a physical settlement request or placing a limit order, is voluntary, stressed the source. Someone settling a CDS contract outside the auction process could also theoretically receive part of those loans, he continued, adding that the four USD 50m loans fit the criteria of a deliverable obligation because of the BTA guarantees.
“Some funds have raised the issue of whether these guarantees are enforceable and, more broadly, have expressed concerns about allegations of fraud at BTA,” said the source familiar with the situation. Questions of enforceability and transparency are valid but the credit-event auction is not intended to address them, he continued.
A CDS buyer has the choice to either settle in cash having netted off the value of the deliverable, or deliver debt to the seller, explained the second fund manager. “Then it’s a lottery – CDS sellers can get bonds or loans or guarantees [via their appointed dealer],” he added. “The new holder then either sells that deliverable on, or participates in the restructuring.”
BTA declined to comment on the third parties or their relationship to the bank. Credit Suisse did not respond to requests for comment.
By the book
ISDA has a 15-member determinations committee tasked with ruling on the deliverables submitted by market participants for inclusion. This is a legalistic process that examines whether an obligation is in the right currency and governed by the right law, and whether a guarantee appears valid, said the same source. “The committee could refuse [a deliverable] but then it would be like it was ruling on enforceability, which it can’t,” he added.
The credit-event auction was supposed to take place last Thursday (4 June) but was postponed because of a clash with a BTA investor call. The auction terms will be set this afternoon.
On last Thursday’s call BTA representatives gave the impression that the bank would not challenge the guarantees on the four loans, meaning it would treat them in the same way as its other obligations, said the second fund manager.
Creditors are still waiting for a full restructuring proposal. “The bank said it was aiming to finish the process by the end of July, but this could be optimistic considering the extent of the bank’s problems,” said one investor who took part in the call.
BTA estimated last week that it would post a net loss of KZT 1,118bn [USD 7.53bn] for FY08 after impairments rose to KZT 1,217bn from KZT 137bn in 2007.
The bank’s chairman, Anvar Saidenov, acknowledged that the results were “disappointing”. Due diligence undertaken by the bank’s new management and its advisers led to a dramatic upward revision in provisions for bad debts, he said.
State-controlled wealth fund Samruk-Kazyna took control of BTA earlier this year but will not provide further liquidity injections, Saidenov said. He added that he was unaware of any approaches to bank from strategic investors besides the well-publicised interest of state-owned Russian lender Sberbank.
BTA’s unsecured debt instruments total around USD 9bn and include USD 1bn of syndicated loans, USD 1.4bn of bilateral loans, USD 1.6bn of structured finance transactions and USD 4.7bn of Eurobonds, as reported. According to figures released yesterday, the bank has a current cash position of KZT 146bn [USD 984m], plus KZT 759bn of liquid securities.
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