Azeri Bank Plans $3.3 Billion Restructuring After Defaulting

(Bloomberg) -- The largest bank in Azerbaijan has halted its foreign debt payments and will start restructuring talks with creditors after a currency crisis in the Caspian Sea nation drove the lender to the brink of collapse.

Under a restructuring plan published on Friday, the International Bank of Azerbaijan said its “designated financial indebtedness” was at $3.3 billion as of April 18. It missed a principal and interest payment on a $100 million subordinated loan on May 10, according to an emailed statement from the government-owned lender on Thursday.

Some of its foreign-currency debts will be exchanged for sovereign, while the proposed restructuring plan will become binding if approved by creditors accounting for two-thirds of the company’s affected debt by value. In court documents filed in the U.S., the bank identified Cargill Financial Services International Inc. as its largest single creditor.

“We hope that the government may finally offer an acceptable, ‘no-pain’ for debt investors, ‘par-to-par’ exchange without haircut,” Egor Fedorov, a senior credit analyst at ING Groep NV in Moscow, said by email. Azerbaijan is “making a lot of steps towards international investors in the international arena” and, in a worst-case scenario, “the debt restructuring will create negative risk perception,” he said.

A rebound in oil prices this year has brought little relief for Azerbaijan, the third-biggest crude producer in the former Soviet Union, which fought a run on its currency last year after already suffering two devaluations in 2015. The government has so far spent 9.93 billion manat ($5.9 billion) on buying the bank’s toxic assets, while also placing more than $1.3 billion on deposit to provide liquidity.

The bank’s former chairman, Jahangir Haciyev, is serving a 15-year term in prison after being convicted for embezzlement and abuse of office in 2016. Haciyev, a relative of former National Security Minister Eldar Mahmudov, has denied the charges.

The price of the bank’s $500 million of 2019 dollar bonds tumbled 16 percent on Thursday, lifting the yield 9.45 percentage points to 14.806 percent. The yield dropped 2.1 percentage points as of 4:33 p.m. in Baku on Friday. The government’s dollar bonds maturing in 2024 also sank on Thursday, lifting the yield by the most in two months. The yield fell eight basis points on Friday to 4.48 percent.

‘Financial Viability’

“Re-establishing the financial viability of IBA is critical so that the bank can continue to provide important banking services to the Azerbaijan economy,” Finance Minister Samir Sharifov said in the statement. No depositors will be affected by the plan, he said.

Still, two $500 million deposits of Azerbaijan’s State Oil Fund, known as Sofaz, were on the list of the bank’s “designated financial indebtedness” published on Friday. It also included the $500 million Eurobond due 2019 as well as debt owed to creditors including Societe Generale SA, Commerzbank AG, Intesa Sanpaolo SpA and Cargill.

Proposals for the terms of the restructuring and its expected timetable will be unveiled for investors at a presentation at the offices of White & Case LLP in London on May 23 at 11:30 a.m. The bank is being advised by White & Case and Lazard Freres.

Court Filing

On Thursday, the International Bank of Azerbaijan filed court papers to protect four U.S.-located “correspondent accounts” that are used to complete various dollar-denominated transactions. The filing is also designed to block any creditor lawsuits that could interfere with the bank’s main restructuring process, the lender said in an affidavit filed in federal court in Manhattan.

The filing was made under Chapter 15 of the U.S. Bankruptcy Code, which allows a judge to shield the U.S. assets of a foreign company from creditors while the company restructures. Creditors can challenge the protection by trying to prove that the foreign restructuring process isn’t fair.

IBA asked the U.S. court to recognize the restructuring process already started in Azerbaijan, saying it’s “very similar” to several proceedings to overhaul debt by Kazakh banks that have already been accepted by the court.

In the petition filed in the U.S. court, the bank said it started considering the possibility of a debt overhaul starting last February. In March, it failed to make a principal payment owed to Cargill, forcing the first of two extensions on the defaulted debt.
 

Looming Payments

IBA was due to pay $369 million this year on its loans, with $64 million and $205 million due in August and October, respectively, according to an investor presentation based on first-half results for 2016.

The plan’s approval will pave the way for further state aid, Azerbaijan’s Financial Markets Supervisory Authority said in a statement.

“We are concerned regarding the continuing decline in the financial and capital indicators of the bank,” said Rufat Aslanli, head of the regulator. “Implementation of IBA’s proposed restructuring plan, as a precursor to the provision of further support for IBA from the government, is an important step not only for the bank, but for the entire banking sector of Azerbaijan.”

--With assistance from Nariman Gizitdinov Luca Casiraghi and Steven Church

To contact the reporter on this story: Zulfugar Agayev in Baku at zagayev@bloomberg.net.

To contact the editors responsible for this story: Torrey Clark at tclark8@bloomberg.net, Paul Abelsky, Tony Halpin