Creditor's of Ukraine's defaulted banks can expect 40% recovery

Standard & Poor's Ratings Services said today that although recovery rates for creditors of defaulted banks in Kazakhstan, Russia, and Ukraine (KRU) have historically been muted, they could improve with support from the state.

"We believe that recoveries could be restricted and unpredictable, largely because of limited bank supervision and what we see as arbitrary frameworks for bankruptcy and bank restructuring in KRU," said Standard & Poor's credit analyst Sergey Voronenko. "In our view, this situation may be exacerbated by the approach of the banks' management and what appears to be asset stripping before default, as has been alleged in some recent bank liquidations. These aspects together with other factors have historically constrained our ratings on KRU banks."

"We expect the average recovery prospects for creditors to be less than 40% through the cycle, with strong disparities in individual cases," added Standard & Poor's credit analyst Ekaterina Trofimova. "This is despite some progress, most notably in Russia, from the previous decade. Recoveries may be even lower in 2010 and 2011, owing to the likely continuation of weak economic conditions in KRU.”



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KRU banking systems have retained their somewhat unusual and shifting logic, rooted in personalities, politics, and what we regard as opportunistic funding policies. This, together with factors such as what we regard as structural weaknesses in the banking systems, unpredictable insolvency regimes, and underdeveloped corporate governance could leave the creditors of many defaulted KRU banks with only meager recoveries.

KRU governments' initiatives to enhance banking supervision and the bankruptcy framework are critical factors for the future recovery prospects of KRU bank creditors, but progress is still hesitant, in our view. Government support and intervention depend on market circumstances in KRU and would likely aim to reassure depositors and investors.

"We see better recovery prospects for creditors if problem KRU banks are restructured rather than liquidated, as demonstrated by recent cases involving sizable amounts," said Mr. Voronenko.

"Still, we believe restructuring would only be effective if this process is amicable, relatively rapid, and adequately managed, with cooperation among creditors, bank shareholders, management, and regulators," said Ms. Trofimova.