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Eurasia
May 19, 2017 www.intellinews.com I Page 19
IBA’s default seen damaging Azerbaijan’s international reputation
bne IntelliNews
The fallout from the announcement by state- owned International Bank of Azerbaijan (IBA) that it is defaulting on its debts continued this week, with investor worries hurting other Azerbaijani assets like the $1.25bn of sovereign bonds due in March 2024, which fell for a third day on May 18, lifting the yield 16 basis points to 4.72%, the high- est since March, according to Bloomberg.
The bonds of IBA plunged this week after the bank announced it would default on its debts and Moody’s Investors Service downgraded the bank’s foreign currency senior unsecured debt rating to ‘Caa3’ and placed all long-term ratings on review for a possible downgrade.
IBA, Azerbaijan’s largest bank, announced on May 11 that it would halt foreign currency-denominat- ed loan repayments in order to restructure its fo- rex obligations and swap them for sovereign debt. The state-owned bank appears to be trying to put pressure on its creditors ahead of the restructur- ing. 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 prob- lems are – and how opaque its financial reporting was – and could also indicate that the state sov- ereign wealth fund Sofaz is not as liquid as previ- ously thought.
IBA, Azerbaijan’s largest bank, announced on May 11 that it would halt foreign-currency-denominated loan repayments.
While Azerbaijan’s oil-dependent economy has been in recession for the last year and a half – and is expected to remain in recession this year – Baku sits comfort- ably on $33bn worth of reserves tucked away in Sofaz. Given the fact that the Azerbaijani 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.
More information should be revealed on May 23, when IBA is to present its debt restructuring plan in London, which has been prepared with the help of White & Case and Lazard.
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 chap- ter 15 of the US bankruptcy code to keep creditors from pursuing legal action against it while it is restructuring its business.
The expectation, a banking source told bne Intel- liNews, 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.
IBA’s woes can be traced back to March 2015, when its then-chairman Jahangir Hajiyev –
seen as a promising young banker who could one day become central bank governor – quit unex-