* 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
(Adds fund manager comment)
By Nailia 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. The news sent IBA's
dollar-denominated bond tumbling to its lowest level in over a
The bank's problems 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
An economic slowdown caused by the oil prices - which remain
around half 2014 levels - left many of the bank's creditors
unable to repay their loans. That built up non-performing debts
that 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 wants to restructure include the $500
million Eurobond due on June 11, 2019.
FACTBOX - IBA's debts under restructuring plan
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 to handle the restructuring, also
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.
Pavel Mamai, a portfolio manager at UK hedge fund Promeritum
Investment Management, said IBA's creditors would be
hard-pressed to resist whatever terms Azerbaijan offers because
$1 billion of the debt earmarked for restructuring is held by
state sovereign wealth fund SOFAZ.
With SOFAZ already on board, IBA will be able to get the
approval of the required two-thirds of creditors, especially
with the help of trade finance firms, Mamai predicted.
"Creditors will be told either accept the deal or we declare
bankruptcy," he added. "I don't think creditors will have a lot
However the blow will be softened if creditors receive
sovereign bonds in the exchange, leaving them with a
better-quality asset, said Richard Segal, emerging debt
strategist at Manulife Asset Management.
"But they will have to take a haircut, that's just burden
sharing," he said.
The bank's $500 million bond fell by more
than 17 cents to 82.6 cents as trade opened on Friday. But
prices later recovered to 89 cents while Azerbaijan's manat
currency was largely unmoved.
Investors said Azerbaijan had enough of a financial cushion
to prevent contagion into the wider economy.
"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 expected 2016 financial results to show a
net loss of around 1.9 billion manats ($1.115 billion). It
attributed this to extra provisions against its loan portfolio,
and the fall in the manat's value.
Its Tier 1 capital ratio - a safety cushion against shocks
and bad loans - is expected to be 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 there was no rush by depositors to
withdraw money. An employee at one branch said the bank was
paying out money as normal, with no special restrictions on
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, however, 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 Tom