Fitch Rates International Bank of Azerbaijan's Eurobond 'BB(EXP)'

Tue May 27, 2014 12:08pm EDT

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(The following statement was released by the rating agency) Link to Fitch Ratings' Report: International Bank of Azerbaijan here MOSCOW, May 27 (Fitch) Fitch Ratings has assigned International Bank of Azerbaijan's (IBA) upcoming debut eurobond an expected Long-term 'BB(EXP)' rating. The agency has also affirmed Russia-based bank IBA-Moscow's (IBAM), a 100% subsidiary of IBA, senior unsecured debt at 'BB' and assigned its two upcoming similar issues expected 'BB(EXP)' ratings. IBA's obligations on the eurobond issue will rank equally with the claims of other senior unsecured creditors, except the claims of retail depositors. Under Azerbaijani law, the claims of retail depositors rank above those of other senior unsecured creditors. At end-2013, retail deposits accounted for 28% of IBA's total liabilities. The eurobond issue will have a put option that can be exercised if the state (the current majority shareholder) ceases, at any time, to control directly or indirectly 50% plus one share of IBA. The final rating for the issue is contingent on the receipt of documents conforming materially to information already received. IBAM's bonds are issued in accordance with Russian law and have a three-year tenor. 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 (for more details on Fitch's approach for rating these bond issues see "Fitch Rates IBA-Moscow's Bonds 'BB(EXP)'", dated 27 March 2013, on www.fitchratings.com). KEY RATING DRIVERS The ratings of IBA's eurobond and IBAM's bond issues correspond to IBA's Long-term foreign currency Issuer Default Rating (IDR, BB/Stable). IBA's IDR reflects Fitch's view of a moderate probability of support for the bank, if needed, from the Azerbaijan authorities. This view factors in (i) IBA's majority (50.2%) state ownership and large market share (around 35% at end-2013); (ii) substantial funding from state-controlled and public entities (15% of liabilities at end-2013); (iii) the bank's small size relative to the sovereign's available resources; and (iv) the potentially significant reputational damage for the authorities in case of IBA's default. The two-notch differential between the sovereign rating of 'BBB-' and IBA's rating reflects the track record of quite slow (and limited in volume) capital support in 2011-2012 and weaknesses in the bank's corporate governance. For details on IBA's credit profile see Fitch's report on IBA available at www.fitchratings.com or by clicking on the link above. RATING SENSITIVITIES The senior unsecured debt ratings are likely to move in tandem with IBA's Long-term IDR. The latter may be upgraded by one notch if IBA's recapitalisation plan announced in October 2013 proves sufficient to reserve higher-risk assets and maintain satisfactory capitalisation over a sustained period. Conversely, if new capital is used primarily for further leveraging of IBA's balance sheet, rating upside will be limited. Contact: Primary Analyst Dmitri Vasiliev Director +7 495 956 5576 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Ruslan Bulatov Analyst +7 495 956 9901 Committee Chairperson James Watson Managing Director +7 495 956 6657 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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