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01.07.2008 - MDM Comment: Alliance Bank Up For Sale
Bloomberg has just reported that Alliance Bank's owners hired Merrill Lynch and Credit Suisse to sell a controlling stake in the bank by the end of 2008. Earlier this year we recommended to look at the bank's Eurobonds, specifically the ALLIBK 12 EUR issue. We pointed out at the sale as a potential way to resolve funding challenges of Alliance (see below). While the bonds have traded up since then by 6-7 percentage points, in our view, they are still offering good value, given the increased likelihood of the bank's sale. Other bonds that can help play the M&A-related credit upside are ALLIBK 11 GBP and, for aggressive investors - the perpetual one.
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Our commentary from March 31
Either we are missing something, or there is a dramatic price inconsistency in the bonds of Alliance Bank. The ALLIBK 2012 EUR issue is trading at around 19% YTM, which translates into almost 1500bp over Z-swaps, while the 2011 and 2013 USD issues are seen at less than 15%, or 1100-1200bp over Z-swaps. We think one can play this by taking an outright long position in ALLIBK 12 EUR, or in combination with a short position in ALLIBK 13 USD (one may need to hedge currency risk in the latter scenario).
From a credit perspective, we don't view the default risk of Alliance Bank as high. Yes, there are risks related to large exposures to international debt markets and loan book quality. However, we strongly believe in both regulatory and shareholder support of Kazakhstan's fourth largest bank. By shareholder support we don't only mean possible new equity injections or deposits from current owners, but also a partial or full sale to a strategic foreign investor. We have recently seen two major Kazakh banks going into foreign hands (ATF/Unicredit and CenterCredit/Kookmin). Alliance is rated Ba2 by Moody's and BB- by Fitch.
