The International Bank of
The crisis-hit banks’ creditors have until July to approve a plan that will comprise of swapping IBA obligations for sovereign ones, resulting in haircuts, extended maturity rates for notes, and lower yields. If they refuse to approve the plan, the alternative would be the bank's liquidation, Malyukova explains, which would involve even higher losses for creditors.
After the bank made its plan public, Fitch Ratings downgraded IBA from 'CCC' to 'RD' (restricted default). Moody's is unlikely to follow suit, Malyukova says, because its current rating of 'Caa3' reflects the 25% to 30% losses it anticipates for creditors.
The bank's credit restructuring plan, announced on May 23, also angered some of its creditors, particularly those that hold less senior types of credits, such as
In its debt restructuring plan, IBA granted much more favourable terms to trade finance creditors such as Cargill compared to all other creditors, including the holders of its $500mn Eurobond. It is believed that IBA's decision was strategic – it owes some $714mn to the trade finance arm of Cargill, representing more than a fifth of its $3.33bn worth of foreign debt. The Azerbaijani sovereign wealth fund Sofaz is owed another $1.1bn in deposits. Two-thirds of creditors need to approve the plan in order for it to pass. So by granting favourable conditions to Cargill, IBA likely ensured its backing and therefore the approval of the plan.
Malyukova added that the bank's surprise default on its foreign debt came as a result of its sizeable losses of AZN2.25bn (€1.2bn) in 2016, the majority of which were due to its open currency position. "The government has already provided lots of support to IBA by taking over AZN10bn worth of bad debt representing 18% of GDP in 2015-2016. But the losses from the open currency position [AZN1.3bn] last year were so high – its management and the government probably did not anticipate such big losses – that they decided to restructure the debt and share the burden with creditors," Malyukova says.
Just like the bank's investors, Moody's was taken by surprise by the debt default, she adds, saying that "earlier this year they [the Azerbaijani government] said that the losses would be covered by the government through soft facilities and additional capital injections. But the scope of the problems at IBA was higher than they initially realised, which is why they decided to restructure," she believes.
Moody's has placed
At just 53% of GDP,
The Azerbaijani government has announced its intention to privatise IBA after it restructures its debt, a process that will begin no earlier than 2018. However, foreign investors' interest in IBA has declined significantly after the lender's default on its foreign obligations, she believes, meaning that it would only attract some domestic investors. "The process [of privatisation] may take longer than they anticipate," Malyukova says. Furthermore, the operating environment for banks in
The economic recession affecting the oil-rich country –
As such, even after its debt restructuring is completed, the prospects for IBA are dim and the lender is expected to remain a deadweight for
The effects of IBA's debt default will be wide ranging, ratings agency Fitch said in a communiqué on May 26. It will likely lead to an increase in
Meanwhile, on May 23, IBA indicated its intention to "dispose of" its foreign subsidiaries in