* Azerbaijan's economy hit by low oil prices
* Bank laden with bad debts
* It is to suspend repayment on debt
* Creditors likely to face "haircut" - analyst
(Updates with quotes, comments from creditor banks)
By Naila Bagirova and Margarita Antidze
BAKU/TBILISI, May 12 International Bank of
Azerbaijan, the energy exporting country's biggest lender, said
on Friday it needed to restructure more than $3 billion of its
debt, most owed to foreign creditors, to tackle bad loans left
over from the slump in oil prices.
The state-controlled bank announced on Thursday it was
suspending payments on some liabilities and seeking creditors'
support for restructuring. Its dollar-denominated bond tumbled
to its lowest level in over a year as investors reacted to the
The problems at the bank show how Azerbaijan is still
wrestling with the fallout of a prolonged slump on the global
oil market, even though prices recovered some lost ground in
early to mid-2016 and have roughly levelled out since then.
An economic slowdown caused by the oil prices - which remain
around half 2014 levels - left many of the bank's creditors
unable to pay back their loans, building up non-performing debts
which a previous government rescue package failed to fix.
The bank published on Friday what it said was its proposed
restructuring plan. According to this, the total level of debt
subject to restructuring stood at $3.34 billion as of April 18.
This included debt owed to entities including commodities
trader Cargill, Italian lender Intesa Sanpaolo,
Germany's Commerzbank and Bayerische Landesbank, and
France's Societe Generale.
The debt the bank planned to be restructured included a $500
million Eurobond due on June 11, 2019.
The plan did not set out the size of the "haircut" that
creditors will be asked to take under the restructuring.
Typically, creditors are asked to agree to accept a sum less
than they are owed by the debtor.
In the preliminary restructuring plan, the bank said it
plans to exchange at least some of the bank's liabilities for
Azeri sovereign debt.
Azerbaijan's Finance Minister, Samir Sharifov, has said he
will meet the bank's creditors in London on May 23 to seek their
approval for the plan.
Commerzbank, Bayerische Landesbank and SocGen declined to
comment about how they viewed the bank's proposal. Lazard Frères
and White & Case, hired by IBA for the restructuring process,
also declined comment.
People familiar with the views of several creditor
institutions, who did not want to be identified, said the
institutions will participate in the restructuring talks and try
to minimise any losses.
Richard Segal, emerging debt strategist at Manulife Asset
Management, said if IBA's creditors are given sovereign bonds,
that will leave them with a better quality asset, "but they will
have to take a haircut, that's just burden sharing".
In early trading on Friday, the bank's $500 million bond
fell by more than 17 cents to 82.6 cents, its
lowest level since January 2016.
However, Azerbaijan's manat currency was largely unmoved.
Investors said they believed the state had enough of a financial
cushion to prevent contagion from the bank into the wider
"The government still has plenty of money available in its
sovereign wealth fund, it still has a lot of assets it can
access in order to underpin its banks, and I imagine that is
what they will do," said Alan Shipman, economist and consultant
for Oxford Economics.
The bank said it expects its 2016 financial results to show
a net loss of around 1.9 billion manats ($1.115 billion). It
said that was the result of extra provisions against its loan
portfolio, and the fall in the value of the currency.
It said its Tier 1 capital ratio - a safety cushion against
shocks and bad loans - is expected to be negative at
approximately -4.7 percent as of the end of last year. For euro
zone banks, by contrast, the minimum Tier 1 capital ratio is set
at plus 6 percent.
Inside Azerbaijan, a mainly Muslim country that borders
Russia and Iran, news of the restructuring broke on mainstream
media on Thursday night. Television stations did not report in
detail what was happening.
A Reuters reporter who visited several IBA branches in the
capital, Baku, on Friday said that there was no rush by
depositors to withdraw their money. An employee at one branch
said the bank was paying out money as normal, with no special
restrictions on withdrawals.
Several bank customers said they had not heard about the
restructuring. None who spoke to Reuters said they planned to
close their accounts. "I think it's a state bank and nothing is
going to happen with our accounts," said Valida Husseinova, a
There were though rumblings of anger on social media. One
Facebook user, Samir Aliyev, asked what had happened to the
money that the state had already spent on rescuing the bank.
(Additional reporting by Karin Strohecker and Sujata Rao in
LONDON, Arno Schuetze in FRANKFURT and Maya Nikolayeva in PARIS;
Writing by Katya Golubkova and Christian Lowe; Editing by David