Azerbaijan, Baku, March 28 / Trend, A.Akhundov /
Fitch Ratings has assigned Russia-based IBA-Moscow's (IBAM) upcoming RUB3bn bond issue an expected 'BB(EXP)' Long-term rating. The issue benefits from recourse to IBAM's parent, International Bank of Azerbaijan (IBA, 'BB'/Stable/'b-'), the Agency said on Thursday.
The bond will have a three-year tenor, and proceeds from the issue will be used solely for IBAM's purposes. Should IBAM fail to make an interest or principal payment under the terms of the bond, bondholders will benefit from a put option, allowing them to sell the bonds to IBA.
IBA's offer to purchase the bonds in case of a default by IBAM represents an irrevocable undertaking and ranks equally with IBA's other senior unsecured obligations, save those preferred under Azerbaijan law. Under Azerbaijan law, retail depositors rank ahead of other senior unsecured creditors. Retail deposits accounted for 25% of IBA's total liabilities at end-2012, according to the bank's unconsolidated statutory accounts.
The bond's rating is equalised with IBA's Long-term foreign-currency Issuer Default Rating (IDR), reflecting Fitch's view that default risk on the bond and on IBA's other senior unsecured obligations is essentially the same. In Fitch's view, it could be challenging for bondholders to enforce the put option in an Azerbaijan court, in case of need. However, the agency believes that a selective default on the put option is very unlikely, given the reputational risks for IBA, the small size of the issue and the potential for such a default to trigger acceleration of IBA's other debt. Furthermore, in Fitch's view, IBA would have a high propensity to provide support to IBAM, its fully-owned subsidiary, to ensure that that IBAM could itself service its obligations.
IBA's Long-term IDR in turn reflects Fitch's view that there is a moderate probability of support for the bank, if needed, from the Azerbaijan authorities. This view factors in IBA's majority (50.2%) state ownership, its large domestic franchise (the bank accounts for 35% of sector assets), substantial funding from state-owned corporations (30% of deposits at end-Q312), the bank's relatively small size relative to the sovereign's available resources and the potentially significant reputational damage for the authorities in case of IBA's default. The two-notch differential between the 'BBB-' sovereign rating and IBA's rating reflects the delayed and limited recapitalisation of the bank by the Azerbaijan authorities during the past two years, the only 50.2% government stake in IBA, and the potential for the bank to be privatised further in the medium term.
The bond's rating is likely to move in tandem with IBA's Long-term IDR. The Outlook on the IDR is currently Stable, reflecting limited potential for the rating to change in the near term.
IBA-Moscow starts its activity in 2012. Today it is financial institution with 12 offices and branches in Moscow, St. Petersburg and Yekaterinburg.
The official exchange rate is 30,8630 RUR/USD on March 28.