Published: May 27, 2017
The International Bank of Azerbaijan has laid out comprehensive restructuring plans for US$3.3bn of debt that includes a 20% haircut to principal on senior bonds, sparking an outcry among investors.
IBA, Azerbaijan’s largest bank, formally announced the restructuring on May 10 after defaulting on subordinated debt and gave details on May 23.
“Clearly it's good news that the terms are finally out,” said a bond trader who requested anonymity. “The last few weeks have been like your doctor telling you that you have a very bad illness, but please wait to see which one.”
The borrower has offered to swap US$100mn of its subordinated debt into new Azerbaijan sovereign notes at a 50% haircut, while senior creditors - who own around US$2.4bn of IBA’s paper - can pick between swapping into new bonds from the issuer or long maturity sovereign notes. Higher interest rate payments are on offer to senior creditors, though there will be a 20% haircut.
“Senior bondholders can’t work out why they would try for the haircut,” one investor, who owns some of the senior debt, told EMEA Finance. “It’s a small gain for the state but will damage the bank and Azerbaijan’s reputation in bond markets for a long time.”
Another investor asked: “Was he at the same meeting?” when IBA told reporters that discussions had been more constructive than expected.
A bond trader agreed with the investors’ view.
“Why bother with the haircut part of this?” said the trader. “The transfer of obligations to [the Azerbaijan sovereign] is the main part. To then try and jam through savings of around US$200mn versus the scale of the transaction going on and damage to the Azeri brand?”
Subordinated bondholders are being less vocal about the haircut because, at US$100mn, the size is far smaller, and because subordinated debt carries much higher risk, the investor said.
However, the fact that subordinated creditors are getting anything at all when senior bondholders are being asked to take a cut is a contentious point.
“How as senior bond holder do you accept a haircut when the subordinated bond holders are still being offered 50c?” said the bond trader. “That’s US$50mn that could be going to senior guys.”