Azerbaijan's IBA angers creditors with debt restructuring plan

Azerbaijan's IBA angers creditors with debt restructuring plan
IBA, Azerbaijan’s largest bank, announced on May 11 that it would halt foreign currency-denominated loan repayments.
By bne IntelliNews May 23, 2017

Crisis-ridden International Bank of Azerbaijan (IBA) angered investors with its debt restructuring plan announced on May 23, according to Bloomberg.

IBA, Azerbaijan’s largest bank, announced on May 11 that it would halt foreign currency-denominated loan repayments in order to restructure its forex obligations and swap them for sovereign debt. The state-owned bank appears to be trying to put pressure on its creditors ahead of the restructuring. It has $3.33bn of outstanding debt, with US-based food giant Cargill and Citibank amongst its largest creditors.

The announcement was a shock because the struggling bank was rescued by the state in 2015 and was being recapitalised and cleaned up prior to a planned reprivatisation.

The lender offered creditors a number of options at a May 23 meeting in London. Trade finance creditors, foremost among which is Cargill, received the most advantageous terms – namely the ability to swap their obligations at par with sovereign debt maturing in three months and four years. Trade finance represents $861.5mn of IBA's $3.3bn in foreign debt.

In order for its debt restructuring plan to be approved, IBA needs to win the support of two thirds of its creditors. The Azerbaijani sovereign wealth fund Sofaz accounts for approximately a third of IBA's debt and is expected to support the plan; making sure that Cargill is behind it as well could mean that IBA's plan will pass.

Other creditors, however, received less favourable terms. Senior creditors owed $2.4bn were given the option of choosing between new IBA notes or long-term state bonds, with the option to take a 20% reduction in the principal in exchange for higher interest rate payments, according to Eric Lalo, adviser at consultancy Lazard Freres, hired to represent IBA. Ireland's Rubrika Finance, a holder of subordinated debt, which is a less senior form of debt, was only offered a 50% haircut on its claims worth $100mn.

If creditors veto IBA's plan, Azerbaijani authorities are looking at options such as temporary administration, a transfer of assets and even revoking IBA's license, Rufat Aslanli, chairman of Azerbaijan's financial markets regulator, told creditors at the London meeting.  Aslanli said that Baku expects the plan to be approved as soon as possible,  and no later than July so that it can be executed by August 24.

Following the restructuring, Azerbaijan's government debt would increase by a maximum of 6% of GDP, or $2.34bn.

IBA's $500mn Eurobonds have dropped by more than 20 cents to the dollar since early May, and by three cents on May 23 alone, according to Reuters.

Lutz Roehmeyer of Landesbank Berlin Investment told Bloomberg that creditors were "very angry" about the haircut. "This proposal shows the unwillingness to pay of the sovereign while at the same time having the full ability to pay. This will make funding long term costlier for Azerbaijan," he said.

Azerbaijani Finance Minister Samir Sharifov fought back. "You took this decision [to lend to IBA], now we are helping you out with this decision. [...] You may consider it a haircut or whatever it is, but this is an offer that's on the table," he reportedly said, according to Bloomberg.

Meanwhile, a group of IBA investors reportedly sent a letter to IBA's management and the Azerbaijani finance ministry last week expressing their surprise at IBA's bankruptcy filing in the US on May 12, which came after they had received assurances in January that Baku would continue to support the lender, the Wall Street Journal (WSJ) reported on May 23. WSJ, which saw the letter, said it had been prepared by law firm Shearman & Sterling, and that it could not learn the identities of the investors.

The repercussions of the IBA crisis are already beginning to be felt elsewhere in Azerbaijan's struggling economy. Ratings agency Moody's placed the country's sovereign rating on review for downgrade last week; on May 23, it did the same for state-owned oil company Socar.

Both the Azeri government and Socar are in dire need of external financing at the moment in order to complete a large-scale gas exploration and transport project by 2019. The project is to deliver some 16bn cubic metres of Azerbaijani gas to Turkey and Europe.