The European Bank for Reconstruction and Development (EBRD) is reportedly mulling capitalising its $41mn of loans to Azerbaijan's Demirbank, local banking sources have informed bne IntelliNews.
The EBRD is already a shareholder with a 25% stake in the medium-sized Azerbaijani lender, which was on the verge of default in November according to Fitch Ratings.
By turning its loans into share capital, the EBRD would give a vote of confidence to Demirbank at a time when the Azerbaijani banking sector is being rocked by the default of the largest lender, International Bank of Azerbaijan (IBA), on foreign obligations and the closure of 11 banks in 2016.
In November 2016, Fitch Ratings downgraded Demirbank's long-term issuer default rating from 'B-' to 'CCC' and its viability rating from 'ccc' to 'f' to reflect its view that the bank had failed, before withdrawing the rating altogether.
Demirbank's financial results for 2016 have not been made public. However, Fitch Ratings found that is liquidity levels at end-2016 were alarmingly low, and that the lender was dependent on the central bank's regulatory forbearance and extraordinary external capital support.