Creditors Cry Foul After Default as Azeri Bank Offers Debt Swap

Investors dismayed at being forced to accept a 20 percent principal writedown in a debt restructuring of Azerbaijan’s biggest bank were met with a warning that it may be shut down if creditors fail to back the plan, with the finance minister saying the lender never had the benefit of full sovereign guarantee.

The International Bank of Azerbaijan proposed swapping $3.3 billion of its foreign-currency debt and deposits into a mix of new sovereign securities and the lender’s own bonds, according to a presentation in London on Tuesday. The proposed plan will become binding if approved by creditors accounting for two-thirds of the company’s affected debt by value. Azerbaijan wants to complete the restructuring on Aug. 24.

“Creditors are very angry about the haircut,” said Lutz Roehmeyer, who manages about $2.2 billion including IBA bonds at Landesbank Berlin Investment and plans to vote against the plan. “This proposal shows the unwillingness to pay of the sovereign while at the same time having the full ability to pay. This will make funding long term costlier to Azerbaijan.”

In the list of senior debt it wants to restructure, IBA included a $1 billion deposit of Sofaz, Azerbaijan’s oil fund. Since the fund, just like the lender itself, is controlled by the state, its inclusion effectively gives the bank nearly a third of the support it needs for the proposed restructuring to become binding — even before negotiations with investors get under way.

IBA plans to exchange $100 million of subordinated debt into new sovereign notes worth half the principal, according to Eric Lalo, an adviser for IBA at Lazard Freres. Senior creditors owed about $2.4 billion can choose between new IBA notes or long-term state bonds, with an option to take a 20 percent principal reduction in exchange for higher interest-rate payments, he said. For trade finance creditors, owed $861 million, the lender offered to swap at par into sovereign debt maturing in three months and four years.

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‘Whatever It Is’

“You may consider it a haircut or whatever it is, but this is an offer that’s on the table,” Finance Minister Samir Sharifov said. 

Research conducted by the International Monetary Fund has found that debt restructurings have a substantial and long-lasting impact on the conditions for regaining market-access: the bigger the principal reduction, the higher the borrowing costs will be. The effect decreases over time but is still significant as much as six years after the restructuring, according to the study.

Following the restructuring, Azerbaijan expects its government debt to increase by a maximum of $2.34 billion, or about 6 percent of gross domestic product.

IBA’s $500 million of 2019 dollar bonds have tumbled to 82.24 cents on the dollar, dropping more than 18 cents since the day before the restructuring was announced on May 11. The notes lost about 1 cent during the bank’s presentation on Tuesday.

Azerbaijan, the third-biggest crude producer in the former Soviet Union, fought a run on its currency last year after already suffering two devaluations in 2015 as oil prices crashed. The country’s largest lender surprised creditors this month by announcing a default after missing a payment due May 10 on a $100 million subordinated loan and starting a restructuring process.

Or Else

“We would like this restructuring plan approved as soon as possible,” said Rufat Aslanli, head of Azerbaijan’s Financial Markets Supervisory Authority. Otherwise the regulator could resort to options that include temporary administration, a transfer of assets and license revocation, he said.

The bank’s finances have continued to deteriorate even after the government spent 9.93 billion manat ($5.9 billion) on buying its toxic assets, while also placing more than $1.3 billion on deposit to provide liquidity. At the end of last year, the bank had a foreign-currency gap of $2.8 billion and a liquidity buffer of only $509 million.

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IBA expects to book additional provisions of 381 million manat in the first half of 2017, according to its presentation. Another 4 billion manat in bad assets will be transferred to the state if the restructuring plan is approved.

The bank included a $500 million Eurobond due 2019 on the list of its “designated financial indebtedness” it wants to restructure, as well as debt held by investors including Societe Generale SA, Commerzbank AG and Intesa Sanpaolo SpA. It owes more than $700 million to Chicago-based Cargill Financial Services International Inc., its largest trade creditor, according to a legal filing. 

‘Crammed Down’

“The vote of the creditors is a small share of the vote,” said Greg Saichin, the chief investment officer for emerging-market bonds at Allianz Global Investors in London, which has 480 billion euros ($511 billion) under management including IBA debt. “The probability that they are crammed down with a share of the friendly vote is high.”

Under the proposal, the lender will swap at least $625 million of senior claims into sovereign bonds maturing in 12 years with a 20 percent haircut, while the rest will be exchanged for separate sovereign bonds due in 15 years with no principal reduction, Lalo and Sharifov told reporters on Tuesday. Azerbaijan’s oil fund will convert its $1 billion deposit into IBA’s new bonds due 2024 unless other senior creditors choose to do so, they said.

Although the government will seek to privatize the lender “as soon as possible,” that won’t happen before 2018, Sharifov said. As part of its internal reorganization, IBA also plans to dispose of its units in Russia and Georgia, according to its presentation.

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“It’s somewhat disappointing to see that we’ll have to consider taking a haircut — it’s not what I was expecting,” Saichin said. “The savings that the government and bank have made are minimal. It wasn’t worth the government’s reputation to make holders incur losses. Nor is it cheap for the bank to pay higher premiums in the market when they could have dealt with it in a different way.”