ANALYSIS: Rising number of defaults on KASE points to broader malaise in the economy

analysis

ANALYSIS: Rising number of defaults on KASE points to broader malaise in the economy

By SRI ⋅ April 9, 2009 ⋅

(SRI) - As the global economic crisis takes its toll on Kazakhstan’s economy, a rising number of companies start feeling its pinch. The Financial Supervision Agency (FSA) reported this week that as many as 14 domestic bond issuers are or have temporarily been unable to repay or service their debt.

Kazakhstan’s embattled banking sector has long been the focus of international and domestic observers; with more than USD40 billion of outstanding foreign debt and the state having to step in to help the country’s largest banks, it is the biggest elephant in the room. Yet, looking past the headlines, a picture emerges which shows that the trouble has spread beyond the financial sector.

The Kazakhstan Stock Exchange (KASE) currently lists ten companies that issued debt tradable on the stock exchange which they are no longer able to service. Four additional companies, whose bonds are not traded on the KASE, have announced defaults as well. The ten companies on KASE’s default list have raised debt totaling approximately USD345 million.

The companies on KASE’s “black list” are Almaty Distillery Plant, ICKE CAT Company, Transstroymost, REMIX-R, Glotur, Kazneftekhim, KOMBISNAB, Kazakh Distribution Company, ROSA, and Doszhan Temir Zholy.

According to a statement issued by FSA commenting on the situation, the defaults were mainly due to delayed incoming payments for sold goods and products, a reduction in sales, and the overall difficult economic situation.

Kazakh Distribution Company, a wholesale distributor of beer and soft drinks, blamed soft sales of beer for its decision to delay the coupon payment of its bond issue. It has since attempted to streamline its operations by selling three regional subsidiaries, but warned of worsening economic outlook for its business.

Kazneftekhim, a local oil company, decided to postpone its coupon payments, citing “untimely inflow of funds from oil export,” KASE reported.

GLOTUR, a major provider of IT services, has delayed the repayment of its bond because of slowing demand for IT solutions, as local companies cut their budgets.

The remaining companies paint similar picture, citing the worsening economic climate, which has either hit them directly, as demands for their services of goods fell, or indirectly, as they experienced delays in payment from partners or customers affected by the crisis.

According to Andrei Tsalyuk, vice president of KASE, the one notable exception is the default of Doszhan Temir Zholy (DTZh),

DTZh’s situation is different, since its failure to service debt is the result of an incomplete legislation regulating concessionary projects rather than of a bad financial situation. DTZh, which operates a rail line in Eastern Kazakhstan, has been a pioneering public-private partnership project and its bonds are guaranteed by the state. The mechanism to actually provide the state guarantee has not been finalized, however, and investors and the government have found themselves struggling to find ways to solve the issue when DTZh defaulted on its inflation-linked bond payment in August 2008.

Bleak outlook

So far, all of the companies conduct business as usual and cite temporary difficulties that prevented them from repaying their debt or paying their coupon interest on time. Nevertheless, while those difficulties may be temporary, the companies’ inability to generate sufficient cash flow gives rise to concern over the general outlook of the Kazakh corporate sector. From 2000 until 2007, the economy has on average grown by 10 percent annually, and businesses experienced record profits and easy access to borrowing. This, however, has made them more vulnerable since the economic downturn set in, as they had to abruptly adjust to new economic conditions. This has revealed the gap between the haves and the have-nots, those firms with sound business models and positive outlooks, and those that simply rode the wave of overall financial prosperity.

“The list of defaults is likely to rise as the crisis continues,” thinks KASE’s Tsalyuk. “And so-called second-tier companies are especially vulnerable to default risk - the ones whose business and financing options are not very diversified.”

Bauyrzhan Tulepov, director of research and risk management at Tengry Finance, a local financial services firm, offers his own assessment of the market situation.

“We analyzed 58 companies, whose bonds are listed on KASE,” Tulepov said in an interview with the Kazakh business journal Expert Kazakhstan. “The overwhelming majority of those companies show low turnover of assets, and also very low profit margins. Most of the companies have almost no competitive advantage, and all they are trying to do is to survive in the current conditions.”