Fitch Rates IBA-Moscow's Bonds 'BB (EXP)'

 Fitch Rates IBA-Moscow
# 28 March 2013 09:33 (UTC +04:00)

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.

The bond's rating is equalized 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 recapitalization 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 privatized further in the medium term.

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