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UPDATE 2-Azerbaijan angers IBA creditors with offer of losses and delay
May 23, 2017 / 1:42 PM / 4 months ago

UPDATE 2-Azerbaijan angers IBA creditors with offer of losses and delay

(Adds more comment from advisor, investors)

By Sujata Rao and Karin Strohecker

LONDON, May 23 (Reuters) - 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 of debt.

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 the dollar.

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

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