ADM is an investment advisor to a fund. We advise the Kazakhstan Capital Recovery Fund (KCRF), which was set up jointly by Kazakhstan Capital Management (KCM). The fund is targeting distressed asset investments, which is definitely the correct field. Due to the consequences of the global financial crisis, the Kazakhstani financial system was damaged. Many borrowers were not in a position to service their debt, and therefore became distressed. There are a number of reasons for this, including the general economic contraction and the under-capitalization of many companies with high levels of debt and inadequate capital. The investors recognized an opportunity to set up this fund. We have identified and executed several transactions. We don’t actually look for distressed assets—we seek distressed sellers. The assets we help are similar to a tree or flower that hasn’t been tended properly; in order for it to be healthy, it needs to be watered and cared for. If the crop was bad to begin with, it doesn’t matter how much you water it. We aren’t seeking to help someone whose assets are inherently in bad shape. It’s very difficult to turn around a bank in any economy. But in this economy, there is an increasing scarcity of funding for all institutions. Previously, Kazakhstan relied on the large international capital markets, and only recently have we switched to depend more on the domestic market, based on deposits.
There are still issues in the financial sector that need to be addressed. The regulator has been working hard to resolve some of those issues, and I think a lot of progress has been made. We have seen several initiatives proposed that should help address the backlog of non-performing loans on the banks’ balance sheets. Outside the difficulties faced by the financial sector, in our view Kazakhstan deserves a higher country rating, on a peer comparison basis, than the BBB it has right now. Once these issues have been resolved, I’m sure Kazakhstan will be well positioned to see its rating upgraded. One of the key problems is the shortage of investable projects and the shortage of good-quality borrowers. The biggest institutions in the country are reasonably liquid, have funds that they are ready to deploy, and are looking to expand their lending activities. However, due to competition for quality credits, margins in the banking sector have been declining steadily over the past few years, putting pressure on bank equity. Distressed asset funds are an emerging business niche and a business opportunity. Once again there’s still a lot of improvement in terms of legislation that can be achieved in this respect. More importantly, there are many toxic assets in the world today. Unfortunately, Kazakhstan is not the only country facing this issue—many markets, both emerging and developed, are embattled with the same challenges.
In the Kazakhstani setting, some commentators criticize pension assets as they accrue interest at a slower rate than inflation. There are government guarantees, and we expect that rates should at least return to the same level as the inflation rate. The short-term effect of inflationary pressure was high. With the high inflation rate, there was no instrument that could handle this return in the short term. From that point of view, the inflation spike was not expected. It was not reflected in prices. Today we have a balance mismatch. It was reflected on the pension funds that were invested in different government instruments and corporate bonds. How do we close this mismatch? It has to be covered and refunded by the government. Certain politicians said that the systemic approach was wrong and it needed to change. The problem is that there is no short-term cure. You cannot create a properly functioning money, bond, or fixed-income market that will revive the performance of pension funds and close this gap. The gap exists and it is certainly a liability of the government. Regulation changes are needed before the fixed-income, stock market, and liquid bond markets begin to function properly. This seems unlikely, as the government will always be looking for lower yields for state debt from different bond agencies and also pension assets funding for their own investment programs. This approach will prevail.
The situation has significantly changed in comparison to the previous years, and we strongly believe that our new team is capable of making adequate decisions in this new wave of investment banking. Our main goal is to become a retail investment bank. We are the first company to give our clients the opportunity to work through an internet platform. Our clients can access the ASYL platform from any location in Kazakhstan, and it is compatible with Kazakhstan’s legal framework. Once the People’s IPO enters the market, people across Kazakhstan will begin trading more as attractive companies enter the market. Our model eliminates the problem of distance; our clients do not need to come to an office to do business, and every transaction takes place online. We also decreased the price of our commission rate, and a number of offers are very inexpensive, which is very useful for us and attractive for our clients. There are still many problems, but we can see light at the end of the tunnel. There is a large toxic asset fund that the government can withdraw from the banks to create a new fund. With this fund, all the banks will be able to solve their financial issues and grow freely. The National Bank believes that any bad loans can be withdrawn from the banks or be bought by the government, and that would be very positive for us.
The number one problem the 2008 crisis created was not the dysfunction of the capital markets, but the huge loss of trust in institutions, consultants, experts, and rating agencies. The global economy is still structured around a few places like London and New York, but I believe that we are going through a period when globalization is beginning to reach an apex and is now in decline. In other words, everything will have to go through another painful transformation where stock exchanges shift from seeking to emulate London and look to emerging markets such as Johannesburg. Therefore, Istanbul should be Istanbul, Moscow should be Moscow, and Almaty should be Almaty. These markets don’t have to try to copy the experience of London, New York, or Frankfurt. Quality can mean very different things in different countries, and the emerging markets will benefit from an era of individuality. At Troika Dialog, we are doing everything by the book: research, sales, and trading. I believe that our share of activity on the Kazakhstan Stock Exchange (KASE) is already a bit larger than it would be normally, especially given the amount of resources we employ here in Kazakhstan. Since we have ambitious plans and are looking to enlarge our staff, I anticipate that this will translate into a greater share of the local market.
Astana Finance was initially established by the Municipality of Astana to finance regional projects. It is a widely recognized institution as of today. Based on its asset size in 2007, Astana Finance was among the largest financial institutions in Kazakhstan, with assets exceeding $2 billion. It developed very fast; however, with the global crisis—like Kazakhstan itself—Astana Finance faced certain difficulties. In 2009, Astana Finance went into default and it has sought to negotiate terms with its creditors. We reflect the fact that sometimes people and institutions make mistakes, and there were mistakes concerning Astana Finance. Making mistakes is not bad; it is unavoidable. Some mistakes can be corrected. There was a first term sheet signed in 2009, which was not implemented. The company signed a second term sheet on September 15, 2011, which will hopefully result in a more successful restructuring process. We are working on enhancing our corporate governance structure. Improving risk management is an important item on the agenda. The Board of Directors is a big player, and the creditors committee is monitoring our actions. We will likely apply the best corporate governance standards as we move through the restructuring process. Upon restructuring, around 60% of our shares will be acquired by foreign institutions and individuals.
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