Our Hold recommendation on the International Bank of Azerbaijan (IBAZAZ) 3.5% 2024 bond is unchanged. IBAZAZ has been refused the right to appeal previous judgements upholding the rights of certain holders of the IBAZAZ 5.625% 2019 bond by the UK Supreme Court. This is according to a press release issued by Dechert, the law firm representing the bondholders. As we have previously noted, the bondholders’ claim relied on an 1890 precedent, known as the Gibbs case. The press release disclosed a claim of ‘more than US$170 million’ now due to bondholders. This compares with the total amount issued of US$500mn of the relevant IBAZAZ bond.
The UK Supreme Court decision comes long after a New York court recognised the restructuring at IBA. The decision also comes after other creditors signed a deed of release and received post-restructuring entitlements. In this context, it is not clear that those creditors will be impacted by the UK Supreme Court decision, though we note that IBAZAZ has previously stated that it was necessary to continue to represent itself in the courts to ‘protect the interests of itself and of its creditors who have voted for [the] restructuring plan’. To allow this, IBAZAZ has been granted approval to extend its Restructuring Proceeding by the local Nasimi District Court a number of times. In the most recent update, the Restructuring Proceeding was extended to 25 July this year.
According to the terms of the IBAZAZ 5.625% bond, claims, disputes and other differences are to be settled by the London Court of International Arbitration (LCIA). In a report on the cost and duration of arbitration, the LCIA disclosed that in the 2015-16 period, the total duration of cases in which the amount in dispute was over US$100mn was 18 months. This declined from 32 months in 2013-14. Thus, if the dispute ends up at the LCIA, it may take some time for the relevant bondholders’ claims to be satisfied. It is possible that IBAZAZ may decide to pursue an out-of-court settlement, which may take less time.
There may be implications for English Law bonds in the future, where restructuring is dependent on recognition in the UK under Cross Border Insolvency Regulations of 2006, as in the IBAZAZ case. The Supreme Court decision raises the prospect of more holdouts in future restructuring exercises, especially where restructuring terms are seen as unfavourable by a material group of bondholders.
Potential risks to bondholders from the application of the Financial Stability Board’s (FSB) Key Attributes of Effective Resolution Regimes for Financial Institutions still need to be considered. Azerbaijan is not a member jurisdiction of the FSB, but a number of key emerging market countries are, including Russia, South Africa and Turkey. Where these principles are applied, bonds may absorb losses, as long as (i) the hierarchy of claims is respected; (ii) no creditor is worse off than in a liquidation; and (iii) directors and officers of a bank under resolution are protected in law.
For more details on the IBAZAZ restructuring, see IBA: Born again.