* Bonds tumble after agency raises restructuring fears
* State owner seeks sale by year-end
* Alliance struggling with low capital levels
By Sudip Roy
LONDON, June 20 (IFR) - Alliance Bank's outstanding bonds have crashed more than 30 points over the past month after rating agency Fitch raised fears that it will have to undergo a second debt restructuring in less than five years if its state-backed owner cannot find a buyer for the troubled Kazakh lender by the end of the year.
If so, it would be the second Kazakh bank to undertake two restructurings in quick succession after BTA, illustrating the deep problems still facing those financial institutions that were hurt most by the financial crisis.
Alliance's 10.5% 2017 notes were quoted at 63.45-65.45 on Thursday or a bid yield of 34%, having traded in the mid-90s until mid-May.
The trigger for the collapse in price appears to be a Fitch downgrade of the bank on May 24 from B- to CCC, a move based on the possibility of a new restructuring.
Fitch said its view is based on three points: that Alliance's majority shareholder, sovereign wealth fund Samruk Kazyna, is under instruction from President Nazarbayev to sell the bank by the end of the year; that Samruk is unlikely to inject new capital into Alliance before any sale; and that regulatory forbearance will only continue in the short term.
Finding a buyer, however, is likely to prove difficult, which could mean that creditors would have to face up to the prospect of another haircut.
"If Samruk Kazyna has not made significant progress towards a sale by the end-2013 deadline, then it will likely seek to restore Alliance's solvency through a restructuring of the bank's liabilities," said Fitch.
However, one banking lawyer who has advised Kazakh lenders in the past, said that such a drastic step is still a long way off. "There is no talk about a restructuring. Samruk has said it would like to sell its banking stakes by the end of the year."
The biggest challenge for any prospective buyer is Alliance's low capital levels. Its Tier I ratio, according to Basel I rules as at the end of the first quarter, was a meagre 2.7%, while its total capital adequacy ratio was just 4.77%.
One banker thinks that with Samruk unlikely to make any further capital injections, investors have lost patience. "It looks like some guys set up shorts since Alliance has had a capital deficit for a while," he said.
Alliance reported a KZT4.3bn (USD28.4bn) net pre-impairment loss for 2012, though in the first quarter it achieved a small profit of KZT0.2bn due to earning assets growth and the higher coupon yield on Samruk bonds, said Fitch.
The bank also faces a liquidity challenge. It has USD473m of external debt repayments between 2014 and 2017, with USD148m due in both 2015 and 2016. Alliance currently has USD419m of liquid assets, covering just over 88% of these due payments.
One option Samruk could pursue is to try to sell Alliance together with Temir, another bank it took over following the financial crisis.
"However, considerable uncertainty remains as to whether any such sale will go ahead, given the still weak financial position of any merged bank, limited overall demand for Kazakh banking assets and considerable operational hurdles related to the necessary approvals from creditors and minority shareholders of both banks," said Fitch.
Alliance Bank completed a USD4.5bn restructuring in 2010 after the property bubble burst in Kazakhstan. Its problems saw Samruk take a controlling stake and provide the bank with fresh capital. (Reporting by Sudip Roy, editing by Julian Baker)