Page 11 - bne_Magazine_June_2017

bne June 2017 Companies & Markets I 11
Since the default, yields on IBA’s Eurobond have shot up from 5% to 14.18%, before levelling off at 12.36%. Fitch Ratings downgraded IBA from 'BB' to ‘CCC’ on May 15, while Moody's downgraded it to Caa3, four notches above default. Fitch Ratings said a full default was now "a real possibility".
The expectation, a banking source told bne IntelliNews, is
that the default of IBA – which accounts for more than a third of banking sector assets – would further contribute to the depreciation of the local currency against the dollar; that it would affect local banks' ability to raise foreign capital; and that it would create a "moral hazard in the system" and a deposit outflow from the banking sector.
The market reaction in the first week after the default was sub- dued but that is not to say that it will stay that way. According to Bloomberg, Azerbaijan’s $1.25bn of sovereign bonds due in March 2024 fell for a third day on May 18, lifting the yield 16 basis points to 4.72%, the highest since March.
But the impact of the default could be felt more strongly down the line, according to Raiffaisen Bank International (RBI), particularly if IBA tries to force unfavourable terms on its creditors.
Meanwhile, the bank's clients have all the reasons to worry. Foremost among them is the Azerbaijani state-owned oil company Socar, which keeps 40% of its cash and equivalents in the lender. Moody's said that the debt restructuring could affect Socar's ability to access cash and delay investment projects that are strategically important. According to Bloom- berg, the yield on Socar's $1bn Eurobond maturing in march 2023 climbed by 15bps to 5.57% on May 18.
Kazakh pension funds that had purchased IBA's Eurobonds have come under political pressure and are being accused of incompetence, according to Eurasianet. Privately-run KTK pension fund reportedly purchased $224mn worth of IBA's Eurobonds in 2014. Ehe likelihood for the money to be recov- ered is low, according to Aidar Alibayev, former chairman of the Kazakh Association of Pension Funds.
According to the list of creditors seen by bne IntelliNews, on April 12, the bank defaulted on four loans worth $294.6mn that it owed to Cargill Trade and Structured Finance, the food giant’s trade finance arm. Neither IBA nor Cargill dis- closed the fact at the time. In total, Cargill extended IBA 11 loans worth some $714.8mn. In addition to the four loans that matured on April 12, IBA is to repay another three loans to Cargill worth some $163mn by year-end, and four more in 2018 and 2019.
In an emailed statement to bne IntelliNews, the food company said: “Cargill is bound by confidentiality arrangements with its market counterparties and customers. As such, we are unable to provide any details of transactions that may have occurred and that have been reported on in the media.”
Citibank is IBA's second largest lender, having acted as an agent for a $205mn syndicated loan expected to mature on October 31 and as a trustee of the bank's $500mn Eurobond that will mature in June 2019.
IBA has also defaulted on repaying a $100mn loan to Rubrika Finance, a company owned by one of Ireland's richest men, Martin Noughton.
The list also contains Credit Suisse, which acted as agent
on five loans worth cumulatively $254mn and €28mn; UK's Emerald ($250mn private placement that matures in October 2024); and Tanzania's FBME Bank ($111mn bilateral loan). Among the less exposed creditors are Germany's Commerz- bank, Landesbank Berlin and Bayerishe Landesbank; Italy's Banco Popolare, Intesa Sanpaolo and Banca Monte dei Pasci di Siena; Russia's Sberbank; the Netherlands' Rabobank and France's Societe Generale.
The beginning
IBA's woes can be traced back to March 2015, when its then-chairman Jahangir Hajiyev – seen as a promising young banker who could become central bank governor – quit unex- pectedly citing health reasons. In the weeks after his resigna- tion, IBA unravelled.
The bank's borrowing and lending modus operandi, which had consisted of borrowing in foreign currency and lending domestically in manats, had become insupportable following a 35% depreciation of the manat in February. The cost of ser- vicing the bank's external debt reportedly increased by 20%
“Some of the most prominent businessmen in Baku have been accused of taking out loans that they had no way of repaying”
straightaway after the depreciation. In the ensuing months, a snowball effect of further depreciations and defaults on loans pushed the rate of non-performing loans in IBA's asset portfolio up to 80%.
Azerbaijani authorities took over IBA, increasing their share in the bank from 51% to 81% by injecting some AZN600mn (€324mn) worth of capital to recapitalise the lender and absorbing AZN10bn worth of bad assets through state finan- cial institution Aqrarkredit.
Officials then started talking about privatisation. In Novem- ber, Rufat Aslanli, chairman of Azerbaijan's financial markets regulator, said that the government was mulling an early privatisation for the lender as soon as it cleaned up its balance sheet.
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