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Fitch: IBA Plan Raises Azerbaijan Debt, Costs May Rise Further
May 25, 2017 / 1:44 PM / 8 months ago

Fitch: IBA Plan Raises Azerbaijan Debt, Costs May Rise Further

(The following statement was released by the rating agency) PARIS/LONDON, May 25 (Fitch) International Bank of Azerbaijan's (IBA) proposed debt restructuring would increase Azerbaijan's public debt without ending uncertainty about the total cost to the sovereign of supporting the banking sector, Fitch Ratings says. IBA on Tuesday launched an offer to creditors that would exchange USD3.3 billion of its debt for around USD2.3 billion of new sovereign debt. Approval of the proposal requires the support of two-thirds of affected creditors at a claimants meeting tentatively scheduled for 13 July. The fall in oil prices, and subsequent economic slowdown and manat devaluation, has left Azerbaijan's already weak banking sector in a very fragile condition. IBA, the largest bank in the country, has also been affected by past mismanagement. In 2015 and 2016 the bank transferred around AZN10 billion of bad assets to a dedicated institution, Aqrarkredit, which issued bonds subscribed by the Central Bank of the Republic of Azerbaijan (CBAR) and guaranteed by the state, adding around 15% of forecast 2017 GDP in sovereign contingent liabilities which are only partially recorded in official public debt figures. Other support mechanisms for the banking sector had been planned for 2017. The government injected AZN0.6 billion (0.9% of 2017 GDP) into IBA in early 2017, and the sovereign oil fund Sofaz budgeted an AZN7.5 billion (11% of 2017 GDP) transfer to CBAR in 2017 to support macro stability and the banking system as a whole. Under IBA's proposed restructuring, public debt to GDP would rise by around 6pp-7pp in 2017, bringing it to around 29% by end-2017 according to our projections. This is still much lower than the 'BB' category median of 51%. But it is not clear that the planned restructuring would remove the need for further sovereign support for IBA. Azerbaijan's Financial Markets and Supervisory Authority described the restructuring plan as "a precursor to the provision of further support" from the government. The authorities have already guaranteed USD3 billion of bonds issued by Aqrarkredit early in 2017, which could be used to transfer additional bad assets from IBA's balance sheet upon completion of the restructuring plan, thereby adding up to 7% of 2017 GDP in contingent liabilities for the state. Sofaz itself is listed as a creditor in IBA's restructuring proposal as a holder of two dollar-denominated deposits totalling USD1 billion. A partial loss on these deposits could add to the decline of Sofaz assets over the last two years, although these would still be substantial (Sofaz had assets of USD33.2 billion at end-1Q17, 92% of end-2016 GDP). Sofaz assets and the large net external creditor position of the sovereign and non-bank private sector mean Azerbaijan's external balance sheet is stronger than 'BB' category medians and a critical support to the sovereign rating. On Wednesday we downgraded IBA's rating to 'RD' as IBA suspended servicing the obligations subject to debt restructuring. Our next scheduled review of Azerbaijan's 'BB+'/Negative sovereign rating is due on 4 August. The Negative Outlook reflects continued risks and uncertainty around the macroeconomic and financial sector adjustment under way. As IBA's restructuring effort proceeds, we will continue to assess the extent to which the materialisation of contingent liabilities stemming from the banking sector could erode the public finances or external asset position, the extent of stresses in the banking sector, and how these affect its ability to support economic activity. Contact: Amelie Roux Director, Sovereigns +33 1 44 29 92 82 Fitch France S.A.S. 60 rue de Monceau Paris 75008 Paul Gamble Senior Director, Sovereigns +44 203 530 1623 Mark Brown Senior Analyst, Fitch Wire +44 20 3530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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