(Adds more comment from advisor, investors)
By Sujata Rao and Karin Strohecker
LONDON May 23 Azerbaijan infuriated state-run
bank IBA's creditors on Tuesday by saying they could swap its
debt for sovereign bonds but some would suffer losses and have
to wait longer to be repaid.
Azeri Finance Minister Samir Sharifov told debt holders they
would receive significant "credit enhancement" by getting
higher-rated sovereign paper, which would raise the government's
debt-to-GDP by $2.34 billion to 27 percent of GDP.
The International Bank of Azerbaijan, the country's biggest
lender, suspended payments on some liabilities and said last
week it was seeking support to restructure more than $3 billion
The bank got into problems in 2015 and Azeri President Ilham
Aliyev followed International Monetary Fund advice, ordering
that its balance sheet be cleaned up and the bank sold off.
"We believe this is a reasonable and mutually beneficial
option for the bank and creditors," Sharifov told investors.
IBA's creditors include commodities trader Cargill,
Italian lender Intesa Sanpaolo, Germany's Commerzbank
and Bayerische Landesbank and French bank
Societe Generale. It also has a $500 million Eurobond
due in 2019.
The bond fell by more than 2 cents after the meeting. Some
angry bondholders said the imposed restructuring and losses
would destroy Azerbaijan's reputation with creditors.
Others complained about the better terms offered to trade
finance creditors, adding that Azerbaijan's oil wealth and low
debt ratios should allow it to improve restructuring terms.
Eric Lalo, managing director at Lazard which is advising
IBA, said trade finance instruments could be exchanged for
sovereign paper at par, repayable over four years and amortising
annually. This amounts to $861.5 million.
Senior creditors, including Eurobond holders, who are the
biggest category with $2.4 billion, have three options, he said.
The first involves swapping into sovereign bonds with a
12-year maturity but amortising in three annual instalments in
years 10, 11 and 12. These would carry a 5-1/8 percent rate and
with an "enhancement value" - or haircut - priced at 20 cents in
Under this option, every $1 in the principal of IBA debt
would be exchanged for $0.8 of sovereign bonds with a minimum
$500 million to be issued, the presentation said.
The second option involved a one-on-one swap into 15-year
3.5 percent sovereign bonds, while the third option is to stay
with IBA, with bonds exchanged at par for a 7-year 3.5 percent
issue, Lalo said.
Holders of subordinated debt worth $100 million are asked to
swap every $1 into $0.5 of sovereign debt, Lalo said.
He later said the bank could review the classification of
investors after some complained they were put into the senior
debt category but were actually trade finance creditors. "We
have no reason to change the terms," he added.
The new instruments will be under English law, said Ian
Clark, partner at White & Case which is also advising IBA. Lalo
said the aim was to get the new bonds included into the widely
used EMBI Global emerging debt index.
IBA is hoping to wrap up the process, which some investors
said was too complex, by the end of August, with two-thirds
support needed from creditors at a July 13 vote.
The proposals should easily be approved because Azeri
sovereign wealth fund SOFAZ holds $1 billion of the senior debt.
It is only eligible to vote for the third option.
However, Pavel Mamai, a portfolio manager at UK hedge fund
Promeritum, said terms were a bit low and "they would need to
improve to get it over the line".
Sharifov said there was no room for change and the
restructuring was essential for the bank's planned privatisation
"This is the offer that's on the table, we are
ready to support, nothing more than that," he said.
(Additional reporting by Alexander Winning in Moscow; Editing
by Alexander Smith and Tom Heneghan)