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10 I Companies & Markets bne June 2017 IBA's default damages Azerbaijan's
international reputation
bne IntelliNews
State-owned International Bank of Azerbaijan’s default on its debts is expected to cause extensive damage to the country’s financial sector and its international reputa- tion, and could even imperil Baku’s search for funding for the landmark Southern Gas Corridor project.
IBA, Azerbaijan’s largest bank, announced on May 11 that it would halt foreign-currency-denominated loan repayments in order to restructure its foreign currency obligations and swap them for sovereign debt. The state-owned bank appears to be trying to put pressure on its creditors ahead of the restruc- turing. It has $3.33bn of outstanding debt, with US-based food giant Cargill and Citibank amongst its largest creditors, according to a list shown to bne IntelliNews.
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. That the bank has now defaulted demonstrates how severe its problems are – and how opaque its financial reporting was – and may also indicate that state sovereign wealth fund Sofaz is not as liquid as previously thought.
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While Azerbaijan's oil-dependent economy has been in reces- sion for the last year and a half – and is expected to remain in recession this year – Baku sits comfortably on $33bn worth of reserves tucked away in Sofaz. Given the fact that the Azerbai- jani government has already spent upwards of $6bn since 2015 on cleaning up IBA's bad assets and recapitalising the bank, that it would delay the repayment of hundred-million-dollar loans and affect the country's thus-far impeccable reputation as a good borrower is perplexing.
On May 23 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. However, 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.
There will also be unwelcome foreign publicity on the bank's woes at a court hearing on June 7 in New York, where IBA filed a petition under chapter 15 of the US bankruptcy code to
keep creditors from pursuing legal action against it while it is restructuring its business.