The International Bank of Azerbaijan’s plan to swap US$3.34bn of foreign currency debt, principally for sovereign bonds with longer maturities, looks likely to be backed by creditors despite some protest from bondholders.
The bank, the country’s largest, is 91% owned by the state, and state oil fund Sofaz is the biggest individual creditor facing the restructuring, with US$1bn in term deposits.
Under the proposal unveiled in London on Tuesday, Sofaz would receive new IBA seven-year bonds paying 3.5% through a par exchange.
All other creditors in the restructuring can take sovereign bonds, unless they prefer the new IBA bonds.
Trade finance related instruments, with a nominal value of US$861.5m, will be given the most lenient treatment. US commodities trader Cargill owns US$715m of those instruments.
Some 21%, or US$181m, can be swapped at par for three-month sovereign notes paying 0.85%. The other US$680.5m, or 79%, can be exchanged, again at par, for four-year 2.82% notes.
These will amortise in equal amounts annually over the four years.
Together these two portions of the debt - the Sofaz deposits and the trade finance instruments - account for 56% of the total debt outstanding.
UPSET CREDITORS
Under the proposed scheme two-thirds of the debt by nominal value has to back the plan for it to go ahead. Their inclusion makes it less likely that the offer will be derailed by more upset creditors.
Holders of the US$500m 5.625% 2019 Eurobond are likely to be among the latter group, but they only account for 15% of the total debt stack targeted. “Even without the bondholders the debt restructuring can go ahead,” said Eric Lalo, managing director at Lazard, IBA’s adviser.
Bondholders, together with other owners of the US$1.38bn of senior instruments targeted, can choose between swapping into a new 12-year sovereign bond at 80 cents in the dollar paying 5.125% or taking a 15-year sovereign note at par paying 3.5%.
The first amortises in three equal amounts in years 10, 11 and 12 and the second in two equal lumps in years 14 and 15. A minimum of US$500m must be allocated to each option. If either falls short then Sofaz will pick up the remainder.
The only class of creditor that faces any definite cut to its principal is the US$100m subordinated note held by Rubrika Finance, on which IBA defaulted on May 10. Rubrika will receive half of this back in the new 12-year sovereign note, under the same terms as above.
The proposals to give these creditors a haircut, either nominally or by net present value calculations, left a bitter taste in the mouths of some bondholders attending the meeting with bank officials and Azeri finance minister Samir Sharifov in London.
One who attended the packed meeting said the country risked upsetting investors for a limited gain. “You are giving a bit of haircut but for the reputational damage why do you bother?” said the bondholder.
“When countries can’t pay and restructure, fair enough. But why do this when a country can pay and is the biggest bank in the country [and is] systemically important? It was trading at par two weeks ago. No one expected the restructuring. It caught people off guard.”
Sharifov said that the proposal allowed creditors to “enhance” their credit by swapping their bank paper for sovereign notes. The bondholder also said the fact that creditors were being asked to vote together despite receiving different offers made the deal unpalatable.
“They have treated creditors differently. They included the US$1bn from Sofaz to help get two thirds of votes. You piss investors off. It sounds very confrontational where it didn’t need to be,” he said.
He did admit that many were happy with the proposal. Another investor at the meeting, without a position in IBA, said: “On the whole the offer looks fair and reasonable. I don’t think there will be much concern.”
CONSIDERING OPTIONS
The cash price of the IBA 2019s only slipped 1 point to be bid at 82 cents in the dollar after the terms were unveiled. Two creditor groups, one advised by law firm Shearman & Sterling, are believed to be forming to consider the options.
Lazard and law firm White & Case, who are advising the bank, said they hoped to publish an information memorandum with full terms on June 14, a month ahead of a claimants’ meeting on July 13 to back the proposals.
A separate vote is not required to change the terms of the Eurobond, or any other instrument, since all are being invited to instead swap their liabilities for new notes. The new instruments, written under English law, will be distributed on August 24.
A key part of the plan is for state vehicle Aqrarkredit to acquire a further M4.9bn (US$2.9bn) of bad assets on top of the M9.9bn it has already taken on.
Most of these stem from loans made under the disgraced former chief executive, who stepped down in March 2015 and has since been jailed for embezzlement. The latest transfer is conditional on the restructuring plan being approved.
“We believe that this proposal fairly serves the interests of the bank’s foreign creditors,” said Sharifov. “The government has consistently supported the bank but have never said its debts are governed by a state guarantee. Now we are offering credit enhancement rather than a haircut.”
The bank said the measures would improve the core Tier 1 ratio from -4.7% at the end of December 2016 to 13%. Sharifov said the government then hoped to privatise the lender, looking at options from next year.
The government’s debt will rise by US$2.34bn, or 6 percentage points, after the restructuring to 25.2% of its GDP.