Creditors of defaulted Azeri bank to contest rehab plan

Bloomberg

Creditors of Azerbaijan’s biggest bank are taking steps to block terms outlined by the lender earlier this week in a $3.3 billion debt restructuring, according to two members of the investor group.
Debtholders of the International Bank of Azerbaijan are arguing their voting rights were diluted by the inclusion in the restructuring of a $1 billion deposit owed to the country’s oil fund, according to the people, who declined to be named because the discussions are private.
The state-run lender, known as IBA, drew the ire of investors at a presentation in London on Tuesday with a proposal to swap foreign-currency debt and deposits into a mix of new sovereign securities and the lender’s own bonds. The plan, which includes a 20 percent principal writedown for some of the senior claims, 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.
Since the state oil fund, also known as Sofaz, is controlled by the state, its inclusion effectively gives the bank nearly a third of the support it needs, leaving investors little room to oppose the plan.
Creditors are also complaining about the exclusion from the restructuring list of about 500 million manat ($297 million) of subordinated debt owed to the Central Bank of Azerbaijan. Holders of $100 million of dollar-denominated subordinated loans were offered a swap into sovereign notes after a 50 percent writedown of their holdings under the restructuring plan. Subordinated debt ranks below other securities in the order of payouts after a default, meaning creditors shouldn’t get their money back until senior debtholders are paid in full.
IBA defaulted on its foreign debts when it failed to repay a $100 million subordinated loan on May 10. While it was well known that the bank’s finances had deteriorated, investors had been given assurances from Azerbaijan’s Finance Ministry that the government of the third-biggest crude producer in the former Soviet Union would continue to prop up the lender, the people said.
According to a letter seen by Bloomberg News, the creditor group addressed some of their complaints to Azeri President Ilham Aliyev on May 19, before the details of the restructuring proposal were released. The investors warned that grouping creditor classes together for voting purposes “could be perceived to be an effort to gerrymander votes,” while the restructuring “would appear to disproportionately impact foreign creditors.”
The bank’s only publicly traded Eurobond, a $500 million note maturing in June 2019, has slumped more than 18 cents on the dollar to 82.33 cents since the default.

“We never said we are going to bail out on a regular basis any state-owned entities because they incurred a debt,” Sharifov said at the presentation. “Although this is a state-owned entity, it doesn’t mean that the government takes responsibility for the debt restructuring. I would like to make that absolutely clear to this audience. I believe it is a very reasonable proposal and as such I encourage you to support it.”
The letter, sent by Shearman & Sterling LLP on behalf of “a large number of sophisticated international financial institutions,” concludes that if the complaints aren’t addressed in the bank’s restructuring plan, “the members of the group are prepared to take actions to protect their interests.” That would include a formal objection to IBA’s filing 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 it restructures, according to the letter.
The bank’s only publicly traded Eurobond, a $500 million note maturing in June 2019, has slumped more than 18 cents on the dollar to 82.33 cents since the default. The yield on Azerbaijan’s sovereign dollar debt maturing in March 2024 has climbed eight basis points to 4.45 percent.