The Russian branch of Standard & Poor’s has recently published a press-release informing on the revision of Fincraft Group LLP’s ratings to negative due to the macroeconomic risks while simultaneously affirming its ‘B/B’ ratings. What’s behind this decision?..
S& P Global Ratings international agency has revised its outlook to negative on Fincraft Group LLP and its subsidiary BTA Bank JSC. What’s behind this decision?
The Russian branch of Standard & Poor’s has recently published a press-release informing on the revision of Fincraft Group LLP’s ratings to negative due to the macroeconomic risks while simultaneously affirming its ‘B/B’ ratings. Let us quote this remarkable (text in bold by kz.expert).
«S& P Global Ratings revised its outlook to negative on Fincraft Group LLP (hereinafter Fincraft) and its subsidiary BTA Bank JSC.
At the same time, we affirmed our ‘B/B’ long- and short-term issuer credit ratings and ‘kzBB+’ Kazakh national scale ratings on both companies and removed the ratings from UCO.
The outlook revision reflects our view that Fincraft and its subsidiary BTA, both of which rely on the sale of assets to service their debt obligations and pay fixed costs, may struggle to dispose of less liquid assets or receive timely payments in 2020 amid the recession in Russia and Kazakhstan.
Fincraft and BTA form a private equity group that focuses on the recovery of assets as part of litigation against a former owner, found liable to pay about 5 $ billion to BTA as a result of various court decisions. The group is controlled by Mr. Kenges Rakishev, a Kazakhstani businessman with a diversified portfolio of assets. In June 2019, he transferred a 29% stake in BTA to Fincraft and transferred the rest of his stake in BTA under management of Fincraft. We understand Fincraft will start to consolidate a 97% stake in BTA by mid-2020.
We consider Fincraft’s stressed leverage to be adequate, estimated at about 1,78x at year-end 2019 when applying conservative haircuts to its investments. The group’s financial liabilities are limited to two 10-year bond issues totalling Kazakhstani tenge (KZT) 65 billion (approximately 140 $ million at current exchange rates).
The assets primarily comprise private equity investments including warehouses in Russia, a large real estate development project in Kazakhstan, and a wide range of property and equity investments across Russia, Kazakhstan, and other countries. We apply a 100% haircut when calculating stressed leverage for exposures to related parties and the controlling shareholder. At the same time, we understand the shareholder intends to transfer additional assets to the group in 2020.
We consider Fincraft’s risk position to be moderate, owing to extreme concentrations on the balance sheet. For example, investments in warehouses in Russia account for more than 35% of its consolidated balance sheet, while exposure to a real estate project in Almaty accounts for another 10%. Although we apply additional haircuts to determine stressed leverage for Fincraft, we think this level of concentration compares unfavorably with global peers and will stay elevated in the long term».
«We think Fincraft and BTA are significantly exposed to country risk. In particular, we view payment culture and rule of law in Kazakhstan as very weak according to our criteria (see „Banking Industry Country Risk Assessment: Kazakhstan,“ published Nov. 28, 2019). Similarly, we consider governance and transparency in Kazakhstan to be still emerging, as demonstrated by a series of commercial bank bankruptcies on the back of mismanagement and, in some cases, looting. We therefore apply three downward notches from the anchor.
The negative outlooks on Fincraft and BTA reflect our expectations that the challenging economic environment in Russia and Kazakhstan could put pressure on the valuation of the group’s investments, as well as its ability to sell its assets and receive timely payments, over the next 12 months».
Since, even with a greatest support of the Kazakh state, BTA Bank JSC will not be able to get back even a small part of those US5 $ bin that have been awarded to it by the British court, it means that, by the end of 2020, it may very well end up in a critical financial situation.
In view of this, the question arises — what can Kenes Rakishev attempt in order to avoid this kind of scenario? In our opinion, apart from trying to stay afloat, nothing.
Meanwhile, if the political situation in Kazakhstan would change in a cardinal way and billionaire Timur Kulibayev (the Head of the Atameken National Entrepreneurs Chamber and the second in a row son-in-law of the First President of the Republic of Kazakhstan) would become one of the victims of these changes, then BTA Bank JSC may seriously improve its financial standing in a matter of several months. How? Very simply — by getting back the two very high-priced assets in which BTA had been investing prior to February 2009 (in other words, under the reign of Mukhtar Ablyazov) and which, during the period of the bank’s rescue, had been stolen by Timur Kulibayev and his team.
We have touched upon this subject in our previous publications a number of times:
A Million Dollar Fiasco (text available in Russian)
On Appointing Rakishev MFA Advisor
On Timur Kulibayev Leaving Federations
Now then, these two assets (one is located in Russia, another in Kazakhstan) represent two operating businesses in which, according to BTA’s and its affiliated offshore companies’ documents, about US1.3 $-1.4 bln have been invested.
Of course, taking into consideration the three crises (that of 2009, 2014 and the ongoing one), the market price of both assets — the warehouse complex (in Russia) and the oil producing company (in Kazakhstan) — has gone down. Apart from that, Timur Kulibayev did not obtain these assets in their entirety; he’s got only a share of them. Nonetheless, Kenes Rakishev could very well get back a half of a billion dollars and do so on legal grounds at that.
And since, in its demands to the Leader of the Nation’s relative, BTA Bank JSC may rest on the British courts’ decisions (or, to be more precise on the body of evidence that had been examined), the likelihood of Timur and Dinara Kulibayevs becoming much poorer does exist. Of course, this kind of scenario must be preceded by Nursultan Nazarbayev’s passing and by a cardinal change in the balance of power within the ruling elite.
Source: kz.expert