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Moody's downgrades Azeri bank; creditors skeptical of restructuring plan

Azerbaijan's largest lender was hit by a second rating downgrade in three days and faces a possible revolt by creditors dissatisfied with the terms of a $3.3 billion debt restructuring.

OJSC International Bank of Azerbaijan launched the debt restructuring earlier in the week of May 22, offering to swap its own debt for sovereign bonds with a haircut. Hit by the slump in global oil prices, the bank earlier in the month suspended its foreign-currency bond payments.

Two members of an investor group told Bloomberg News that they saw their voting rights diluted because a $1 billion deposit from Azerbaijan's oil fund was included in the restructuring. That means that the state-owned bank is already nearly a third of the way to securing the two-thirds majority of creditors that it needs to carry out the restructuring.

A letter sent by law firm Shearman & Sterling LLP on behalf of "a large number of sophisticated international financial institutions," and seen by Bloomberg, states that if the creditors' complaints aren't addressed by the bank, "the members of the group are prepared to take actions to protect their interests." This could include a formal objection to the bank filing under Chapter 15 of the U.S. Bankruptcy Code, which would allow it to shield U.S. assets from creditors during a restructuring.

Meanwhile, Moody's on May 26 downgraded the bank's long-term foreign- and local-currency deposit ratings to Caa2 from B1 and changed the review to direction uncertain from review for downgrade.

The bank's "ca" baseline credit assessment was also placed on review with direction uncertain. Its long-term counterparty risk assessment was downgraded to Caa1(cr) from Ba3(cr) and moved to review with direction uncertain from review for downgrade.

The downgrade of the deposit ratings reflects Moody's assessment of a lower likelihood of government support than previously anticipated. It also noted that should creditors not accept the restructuring, the bank could be placed into liquidation, prompting higher losses for foreign-currency debt and likely losses for uninsured deposits.