Ratings agency Moody's placed Azerbaijan's Ba1 long-term issuer rating and senior unsecured rating on review for downgrade on May 19, the agency announced. The move was prompted by the announcement, a week earlier, that the largest bank in the country, state-owned International Bank of Azerbaijan (IBA, Caa3 on review for downgrade), was halting foreign debt repayments to restructure its debt portfolio.  

Accounting for a third of banking assets in the Azerbaijan, IBA was rescued by the government in 2015. Its default has come as a shock to the markets and it is believed that the government is seeking concessionary terms on its loan repayments.

Having filed for chapter 15 protection from creditors under the US bankruptcy code, IBA will be looking to restructure not only debt, but also a $500mn Eurobond. Moody's downgraded the rating of both IBA's foreign-currency senior unsecured debt and that of its Eurobond on May 15 to Caa3 - down from B1- and placed both ratings on review for downgrade.

IBA's major creditors are Azerbaijani sovereign wealth fund Sofaz, which deposited $1bn in the lender, the trading finance arm of American food giant Cargill, which lent IBA $714.8mn and the purchasers of the bank's $500mn Eurobond. Amongst them is the Kazakh state-owned pension fund, which purchased $250mn worth of the Eurobond issuance in 2014.

Moody's expects the foreign debt restructuring to result in 20% losses for creditors.

The Azerbaijani government has announced plans to issue new foreign-currency denominated bonds and assume most or all of IBA's foreign-currency loans. "Moody's also expects the government will have to provide additional funding to raise IBA's Tier 1 capital adequacy ratio. Despite an injection of another AZN600 million into the bank in January 2017, IBA still has negative equity," the ratings agency wrote in the report.