East-Kazakhstan region: description of risks and comments of listing commission

/IRBIS, June 14, 01/ - Information presented below briefly describes risks that could be incurred by the authorities of the East-Kazakhstan region regarding servicing and circulation of bonds. Announced volume of the bonds' emission is KZT1bn, circulation term - 3 years. Bonds are indexed to dollar exchange rate. The risks description is prepared by financial consultants of the issuer (DB SECURITIES OJSC and TuranAlem Securities LLP), the Ministry of Finance (MOF), the Ministry of Economy and Trade (MET) as well as by the Listing Commission of KASE. IRBIS presents information according to documents of the Commission. The information presented below is published regarding admission of coupon bonds of local executive body of East-Kazakhstan region (EKR) into circulation at KASE RISKS STATED BY THE CONSULTANTS The consultants presented following information on risks, which could undermine financial conditions of the issuer and lead to inability of the issuer to meet obligations: - Difficulties of budget forecasting for the circulation period as a result of underdevelopment of the budget system, lack of transparency of budget withdrawals and subventions. - Modifications of the legislation related to distribution of tax revenues between local and republican budgets. For instance, revenue side of the local budget will be affected by forthcoming lowering of social tax from 26% to 21%. It is not clear whether this measure would be compensated by broadening of the taxable base. Amount of income tax collected from legal entities could be also subjected to variations thanks to creation of the National Fund. The revenues could be impeded by planned foundation of the Development Bank of Kazakhstan (formation of the authorized capital). - Shortage or overestimation of revenues could hinder ability of the issuer to service obligations (coupon rates and principal). At the same time, local legislative authorities have stated that expenditures of the local budget related to bonds servicing will not be subjected to sequestering. - Reserved right of the issuer for prescheduled redemption of bonds crates difficulties in forecasting of cash flows provoking rise refinancing risk (yet, current situation in the securities market significantly lowers impact of the risk). The liquidity will be supported by market-maker, TuranAlem Securities LLP. Nevertheless, there is no confidence that the secondary market will be active. - In case of significant devaluation of tenge vis-a-vis dollar, the issuer could meet servicing problems. According to the MOF, risks associated with dollar exchange rate or losses of the local budget could vary between 517.6m and 551.3m tenge. The money raised through emission will be distributed using two-level system. Firstly, the issuer transfers money to banks selected on a tender. Secondly, according to the credit agreements with the issuer, banks conduct crediting of final borrowers. The issuer and its consultants noted that participation of banks as intermediaries would increase efficiency of funds distribution, and would lower risks associated with default. RISKS STATED BY THE MINISTRY OF FINANCE Crediting. The credit terms and particularly, lumpsum repayment creates high risks of untimely or incomplete redemption of loans. Thus, the local budget is at danger to default on bonds (lumpsum payment as well) for a total of KZT1bn. Misuse of budget funds. The money distribution scheme at which returned credits are being kept in banks during the whole period of borrowing could rise budget money misuse risk (objectives that are not set by the Regional investment program (RIP) described in previous materials of IRBIS). Additional expenditures. The realization of the RIP stipulates some budget expenditures on covering of interest rate subsidy (small-, medium scale business support, about 3.8%) and expenditures related to consulting and other services to the professional participants of the stock exchange market. These expenses require additional sources to be fulfilled. RISKS STATED BY THE MINISTRY OF FINANCE Financial conditions of the final borrowers. No data on financial condition of the final borrowers (according to the RIP) have been presented. Meanwhile these data are important for banks. COMMENTS OF THE LISTING COMMISSION OF KASE In 2000, 26.0% of the budget revenues (1999 - 21.0%) were formed by a single company, Kazzinc OJSC. Worsening of the company's financial conditions could seriously affect revenue side of the budget. Approved budget withdrawals equaled KZT2,407,479 th. (according to the republican budget law for 2001 dated Dec.22, 2000) and were increased by KZT52,373 th (according to modifications put in the same law on April 25, 2001). These changes were not put into documents presented by the issuer and consultants. However, they informed that amendments will be considered in the budget after approval on the session of regional legislative body.