Don't Bet on Calm in Azerbaijan's Bond Market

  • Moody’s warns restructuring is negative for nation’s oil giant
  • Raiffeisen sees sovereign yields climbing 40bps on debt talks

Investors betting Azerbaijan’s debt problems will be contained at the nation’s biggest bank could be in for a shock.

Sovereign yields may jump 40 basis points next week as more details emerge about the International Bank of Azerbaijan’s plan to swap its defaulted debt into new sovereign notes, according to Raiffeisen Bank International AG. On Thursday, Moody’s Investors Service warned the restructuring was “credit negative” for the state oil champion, known as Socar, which keeps about 40 percent of its cash and equivalents at the defaulted lender.

“If the sovereign will assume additional obligations, it will definitely have an impact on the sovereign balance sheet,” Raiffeisen’s Gintaras Slizhyus said. “I wouldn’t buy at these levels.”

A jump in borrowing costs could deepen Azerbaijan’s economic woes at a time when the crude producer is looking to external markets to raise capital for expensive energy projects. The $3.3 billion debt restructuring at IBA comes as the former Soviet republic tries to keep its currency stable after two devaluations in 2015 and the first economic contraction in two decades last year.

Defaulted Azeri Bank Turns to Kazakh Ploy to Sway Creditors

Should the talks sour, and IBA tries to inflict unfavorable terms on creditors, investors can expect a jump of as much as five percentage points in sovereign yields and a review of the nation’s credit score by the main rating companies, Slizhyus said. Azerbaijan’s $1.25 billion of sovereign bonds due in March 2024 fell for a third day on Thursday, lifting the yield 16 basis points to 4.72 percent, the highest since March.

The Caspian Sea nation is rated one notch below investment grade with a negative outlook by all three agencies. Moody’s downgraded IBA’s foreign-currency senior unsecured debt rating this week, saying it expects “losses for creditors in excess of 20 percent” as a result of the restructuring.

Investors Think Twice

Borrowing costs of the State Oil Co. of the Azerbaijan Republic, known as Socar, also climbed on Thursday as Moody’s said the restructuring could hinder the oil company’s ability to access cash. A deterioration in its liquidity could delay investment projects that are strategically important to the Azeri government, the ratings agency said.

The yield on Socar’s $1 billion of debt maturing in March 2023 climbed 15 basis points to 5.57 percent as of 4:13 p.m. in Baku, set for a 55 basis-point increase in the week.

Lutz Roehmeyer, who manages about $2.2 billion including IBA bonds at Landesbank Berlin Investment, said he’d think twice about investing in Azerbaijan again. IBA is due to present its plan at the offices of White & Case LLP in London on May 23 at 11:30 a.m.

“Of course this bad headline is distorting investor confidence,” said Roehmeyer. “Foreigners have less appetite to increase holdings in Azerbaijan.”

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