Bank Default Traps Pension Fund in Azeri Debt Restructuring

  • IBA sold $250 million bond to Kazakh pension fund as oil fell
  • Money owed to Development Bank of Kazakhstan was repaid early

It was an inauspicious time to make a bet on Azerbaijan.

Kazakhstan’s state-run single pension fund plowed $250 million into bonds sold by the International Bank of Azerbaijan, the nation’s biggest lender that defaulted last week and now wants to restructure $3.3 billion in debt. It bought the entire issue by IBA in a private placement via Emerald Capital Ltd. in October 2014, near the height of the crisis in the oil market that would soon engulf both ex-Soviet nations.

Another major Kazakh financial institution was already a creditor of the troubled Azeri bank. But the money owed to the state-owned Development Bank of Kazakhstan -- a $198 million bond also sold via a private placement in September 2013 -- was repaid in four installments in 2016, more than two years before it was due, according to data compiled by Bloomberg and a statement issued on the Cayman Islands Stock Exchange.

The pension fund, however, is now stuck. IBA will unveil the details of its proposal to investors at a presentation in London next Tuesday, with Moody’s Investors Services expecting the restructuring to result in losses for creditors of more than 20 percent. Some of its foreign-currency debts will be exchanged for sovereign obligations. The bank has declined to provide further details.

“This is a result of poor risk management,” said Damir Seisebayev, head of research at Private Asset Management JSC in Almaty. Buying IBA bonds in a private placement was “risky because when something goes wrong, it becomes difficult to sell the securities,” he said.

IBA’s $500 million of 2019 dollar bonds have tumbled to 83.78 cents on the dollar, losing almost 17 cents since the day before the restructuring was announced on May 11. The yield on the government’s dollar notes maturing in 2024 climbed 24 basis points this week to 4.62 percent.

A scandal is meanwhile brewing in Kazakhstan over its pension fund’s dealings in Azerbaijan. Two parliamentary factions, including a pro-business party, are calling for those responsible for the investment decisions to be held to account. 

The unified pension fund, created in 2013, has about $22 billion in retirement savings, which are managed by the central bank. Its holdings include bonds of Kazkommertsbank, a top Kazakh lender that’s getting a 2.4 trillion-tenge ($7.6 billion) state bailout. The pension fund also has deposits held by Kazkommertsbank.

The pension fund referred all questions to the National Bank of Kazakhstan, whose spokesman declined to comment. IBA didn’t immediately reply to questions.

The Development Bank of Kazakhstan said it sought an earlier repayment after learning of plans to privatize IBA, and the Azeri lender agreed. The reason for the bond’s purchase was the high yield on the notes, the Azeri bank’s sufficiently high credit ratings at the time and its status as a state lender, according to an emailed statement from the Kazakh bank.

To read about how IBA wants to sway creditors, click here

Four months after the pension fund’s bond purchase, the Azeri currency lost about a quarter of its value against the dollar in a devaluation by the central bank as oil prices fell by more than half, putting lenders’ balance sheets under strain and sparking an exodus from manat savings among depositors. The currency was devalued for a second time later in 2015.

The $250 million bond was included under IBA’s “designated financial indebtedness,” or money it wants to restructure, published last week. It lists Emerald as the affected creditor and the facility as a “private placement.” The notes have the third-longest maturity of all the credit IBA wants to overhaul.

Emerald, based in Ireland, is a special purpose entity set up for raising money by issuing notes or other obligations. According to a prospectus, it sold the amount in two tranches -- of $200 million and $50 million -- which were then placed on deposit with the International Bank of Azerbaijan.

Kazakhstan’s pension fund said that at the current exchange rate, as of May 1 it owned the equivalent of 78.6 billion tenge of IBA’s dollar bonds due in 2024, according to a report. Around the time it invested in the Azeri bank’s debt, Kazakhstan’s financial system was also in distress, with the central bank about to inject 250 billion tenge to support the nation’s largest lender at the time.

The Azeri government has spent 9.93 billion manat ($5.9 billion) on buying the bank’s toxic assets, while also placing more than $1.3 billion on deposit to provide liquidity. Under a presidential decree in 2015, the authorities shifted its bad and risky loans to a state-owned credit organization, Aqrarkredit.

Before the bonds were sold to the pension fund, IBA reported a negative liquidity gap of 875 million manat for the first half of 2014, which equaled more than $1 billion at the time. The shortfall widened from 871.7 million manat a year earlier. Its former chairman, Jahangir Haciyev, is serving a 15-year term in prison after being convicted for embezzlement and abuse of office in 2016. He’s denied the charges.

“The International Bank of Azerbaijan’s liquidity position was vulnerable in recent years,” said Dmitri Vasiliev, director at Fitch Ratings in Moscow. While it received a credit rating of only one to two levels below the sovereign “because of the high likelihood of support provided by the state, the bank’s financial state and results were also weak.”

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