Rating agency Moody's upgraded the long-term foreign and local currency deposit ratings of Azerbaijan's largest lender, International Bank of Azerbaijan (IBA), on July 25 from 'Caa2' to 'Caa1'. Additionally, the bank's baseline credit assessment (BCA) was upgraded from 'ca' to 'caa3' and its long-term counterparty risk assessment from 'Caa1' to 'B3'.

In a press statement, Moody's said that the upgrade was prompted by the fact that the bank's debt restructuring plan was approved by its creditors on July 18. IBA's default on $3.3bn worth of foreign obligations in May came as a surprise to investors because the bank had been rescued by the government as recently as 2015 and the government had offered verbal reassurances to creditors over recent months.

The terms of the restructuring plan, made public in late May, angered some investors, such as asset managers Fidelity Capital and Franklin Templeton and hedge funds Promeritum Fund and VR Global Partners, which filed a complaint in a US court against the lender in June. However, their case was rejected in late June and an overwhelming majority of creditors - 93.9% - approved the restructuring plan in July.

IBA sought to influence the decision in its favour by including the $1.1bn deposits of Azerbaijani sovereign wealth fund Sofaz in the debt package that was to be restructured, knowing that Sofaz would most likely vote in favour of the plan, and by offering preferential terms to those creditors that approved the plan.

According to Moody's, the implementation of the plan will structure the bank's financial stability and improve its capital position and its asset quality. Furthermore, the transfer of some of its old distressed assets to a state-owned entity, a process that is expected to be completed by the end of the year, will contribute to the bank's improved standing.

Nevertheless, IBA's plans to return to profitability in 2018 are contingent upon the broader macroeconomic performance of Azerbaijan, Moody's wrote.

The oil-exporting Azerbaijani economy is in recession for a second consecutive year due to low oil and gas prices. The drop in export receipts - hydrocarbons used to account for over 95% of Azerbaijan's exports, 40% of GDP and two thirds of state revenues until 2013 - has impacted the entire economy, particularly the construction, real estate and banking sectors.

Moody's also announced it had downgraded the rating of IBA's Moscow subsidiary from 'B2' to 'B3', as it reassessed the level of parental support for the subsidiary. Throughout the restructuring process, IBA said that its foreign subsidiaries would not affected. Banking sources in Baku told bne IntelliNews in May that IBA will most likely sell its foreign subsidiaries in Moscow and Dubai.