A New York court ruling has granted the International Bank of Azerbaijan (IBA) chapter 15 protection under US bankruptcy law, the Wall Street Journal reported on June 28. The petition has been granted a month and a half after Azerbaijan's largest lender filed for protection against creditors in the US while seeking to restructure some $3.3bn worth of foreign debt.

Judge James Gerrity Jr.'s decision is bound to upset some of the bank's creditors, who in June filed an objection against the bank, claiming that its restructuring plan benefitted domestic creditors disproportionately to the detriment of smaller, international creditors. Furthermore, since only two-thirds of creditors need to approve the plan in order for it to pass, and Azerbaijani sovereign wealth fund Sofaz was included among the creditors thanks to a $1.1bn deposit, smaller creditors complained that their vote did not hold much sway. If they vote against the plan - a decision from all creditors is expected by mid-July - the terms of the restructured debt will be significantly worse than if they are in favour.

State-owned IBA's default came as a shock to creditors because the lender was rescued by the state from the brink of default in 2015 and the government had given repeated verbal reassurances to creditors that it would cover its debt. That the biggest bank in the country has come close to default twice in the last two years is symptomatic of the state of the Azerbaijani banking sector, which has been hit by a perfect storm of slow business, currency depreciations and a faulty business model of borrowing in foreign currency and lending in Azerbaijani manats, which has sent asset quality plummeting.

In 2016, 11 of the 44 banks in the country had their licences revoked. Moreover, several medium-sized and large banks like Accessbank, Unibank, Muganbank and Demirbank are now scrambling to recapitalise to stay afloat.

On May 23, the lender presented several options to creditors to swap their obligations for sovereign ones, but in exchange for a reduction in the premium, lower yields and longer maturity rates. The bank later revised the terms of the restructuring to offer more favourable debt repayments, but either way the restructuring will result in either a reduction in the principal and/or longer maturity rates.

After hearing creditors' testimonies, Garrity deemed that the restructuring did not "rise to the level of violating fundamental US principles".

IBA's lawyer, Thomas MacWright, told Garrity that the restructuring process was critical for Azerbaijan's banking sector and economy, pointing to the fact that the disgruntled investors accounted for less than 10% of the restructured liabilities. He added that the lender's largest creditor, the trading finance arm of American food giant Cargill, supported the chapter 15 petition.

A London court awarded IBA similar protection earlier in June. If its debt restructuring plan is approved by creditors, the bank would need to have the plan approved by an Azerbaijani court and then return to the London and New York courts to seek enforcement in the UK and US.