IBA's restructuring plan expected to be approved, says Moody's

IBA's restructuring plan expected to be approved, says Moody's
IBA has $3.33bn of outstanding debt, with US-based food giant Cargill and Citibank amongst its largest creditors.
By bne IntelliNews May 26, 2017

The International Bank of Azerbaijan's (IBA) debt restructuring plan, made public on May 23, is expected to be approved by creditors, Moody's analyst Maria Malyukova told bne IntelliNews on the sidelines of a conference in Baku on May 26.

The crisis-hit banks’ creditors have until July to approve a plan that will comprise of swapping IBA obligations for sovereign ones, resulting in haircuts, extended maturity rates for notes, and lower yields. If they refuse to approve the plan, the alternative would be the bank's liquidation, Malyukova explains, which would involve even higher losses for creditors.

After the bank made its plan public, Fitch Ratings downgraded IBA from 'CCC' to 'RD' (restricted default). Moody's is unlikely to follow suit, Malyukova says, because its current rating of 'Caa3' reflects the 25% to 30% losses it anticipates for creditors.

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. It has $3.33bn of outstanding debt, with US-based food giant Cargill and Citibank amongst its largest creditors. The struggling bank's default came as a shock because it was rescued by the state in 2015 and was being recapitalised and cleaned up prior to a planned reprivatisation. 

The bank's credit restructuring plan, announced on May 23, also angered some of its creditors, particularly those that hold less senior types of credits, such as Ireland's Rubrika Finance, which is faced with a 50% haircut on the subordinated debt it holds.

In its debt restructuring plan, IBA granted much more favourable terms to trade finance creditors such as Cargill compared to all other creditors, including the holders of its $500mn Eurobond. It is believed that IBA's decision was strategic – it owes some $714mn to the trade finance arm of Cargill, representing more than a fifth of its $3.33bn worth of foreign debt. The Azerbaijani sovereign wealth fund Sofaz is owed another $1.1bn in deposits. Two-thirds of creditors need to approve the plan in order for it to pass. So by granting favourable conditions to Cargill, IBA likely ensured its backing and therefore the approval of the plan.

Malyukova added that the bank's surprise default on its foreign debt came as a result of its sizeable losses of AZN2.25bn (€1.2bn) in 2016, the majority of which were due to its open currency position. "The government has already provided lots of support to IBA by taking over AZN10bn worth of bad debt representing 18% of GDP in 2015-2016. But the losses from the open currency position [AZN1.3bn] last year were so high – its management and the government probably did not anticipate such big losses – that they decided to restructure the debt and share the burden with creditors," Malyukova says.

Just like the bank's investors, Moody's was taken by surprise by the debt default, she adds, saying that "earlier this year they [the Azerbaijani government] said that the losses would be covered by the government through soft facilities and additional capital injections. But the scope of the problems at IBA was higher than they initially realised, which is why they decided to restructure," she believes.

Moody's has placed Azerbaijan's sovereign rating of 'Ba1' with a negative outlook on review for downgrade and will make a decision in the next three months, she adds.

At just 53% of GDP, Azerbaijan's banking sector is manageable enough for the Azerbaijani government, which holds some $33bn or 92% of GDP in savings in sovereign wealth fund Sofaz. That said, the liquidity of the fund, which has invested primarily in MSCI-approved developed and emerging market equity and some real estate, is questionable. In case of an emergency, there may be delays in cashing out these assets, Malyukova says.

The Azerbaijani government has announced its intention to privatise IBA after it restructures its debt, a process that will begin no earlier than 2018. However, foreign investors' interest in IBA has declined significantly after the lender's default on its foreign obligations, she believes, meaning that it would only attract some domestic investors. "The process [of privatisation] may take longer than they anticipate," Malyukova says. Furthermore, the operating environment for banks in Azerbaijan remains weak, as reflected by the closure of 11 of the country's 44 lenders last year.

The economic recession affecting the oil-rich country – Azerbaijan's GDP contracted by 3.8% y/y in 2016 and is set for another 1% contraction in 2017 – has had repercussions on the number of publicly financed construction and infrastructure projects. Coupled with several rounds of currency depreciation that saw the manat lose half of its value against the dollar since 2015, the crisis has resulted in high rates of problem loans for banks (Moody's estimates that 30% of the AZN18bn in banking sector loans are problem loans at the moment) and poor prospects for loan generation.

As such, even after its debt restructuring is completed, the prospects for IBA are dim and the lender is expected to remain a deadweight for Azerbaijan's budget for some time to come.

The effects of IBA's debt default will be wide ranging, ratings agency Fitch said in a communiqué on May 26. It will likely lead to an increase in Azerbaijan's public debt from 22% to 29% of GDP by end-2017 and higher borrowing costs for all lenders in the country.  Fitch agrees that "it is not clear that the planned restructuring would remove the need for further sovereign support for IBA". Like Moody's, Fitch is also planning to complete a review of Azerbaijan's sovereign rating – currently 'BB+' with a negative outlook – in August.

Meanwhile, on May 23, IBA indicated its intention to "dispose of" its foreign subsidiaries in Russia and Georgia in a presentation to investors held in London. Local banking sources in Baku have told bne IntelliNews that the bank is looking to sell, rather than dissolve, its subsidiaries. IBA reassured its depositors and clients in Russia and Georgia last week that the debt restructuring would not affect them. 

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