Fitch Assigns Bank IBA-Moscow Rating "BB (EXP)"

Fitch Ratings has assigned an upcoming bond issue in Russia-based Bank of IBA-Moscow 3 billion rubles an expected long-term rating of "BB (EXP)". The issue provides recourse to the parent structure, the International Bank of Azerbaijan ("IBA", "BB" / forecast "Stable" / "b-").

The bonds will have a maturity of three years, and the proceeds from the issue will be used exclusively for the IBA-Moscow. According to the conditions of release, if the IBA-Moscow will not pay interest or principal payments on these bonds, the holders of these securities will have a put option, which allows them to sell the bonds to the bank of the IBA.

IBA offer to buy these bonds in case of default of the IBA-Moscow is an irrevocable undertaking with the same priority in relation to other senior unsecured obligations of IBA except as provided in the legislation of Azerbaijan. According to the legislation of Azerbaijan demands retail depositors have a higher priority than other senior unsecured creditors. At the end of 2012 retail deposits accounted for 25% of the total liabilities of IBA, according to the bank's non-consolidated reporting to national standards.

Bond rating is in line with long-term Issuer Default Rating ("IDR") of the IBA in foreign currency. This reflects the view of Fitch, the risk of default on the bonds is actually at risk of defaulting on other senior unsecured obligations of the IBA. According to the agency, the bond holders can be difficult to achieve the realization of the put option in the court of Azerbaijan in case of need. However, Fitch believes that a selective default under this offer is very unlikely in view of reputation risk for the IBA, the small size of the issue and the potential that such default will accelerate payments on other debt obligations of the IBA. Moreover, the agency believes that the IBA will have a high degree of willingness to support IBA-Moscow, its 100 per cent subsidiary structure, so that she could serve their own commitments.

In turn, the long-term IDR of IBA reflects Fitch's view of the moderate probability of support from the Bank of the Azerbaijani authorities in case of need. This opinion addresses the fact that the majority share in the IBA (50.2%) is owned by the state, but also takes into account a large share of the domestic market (35% of sector assets), significant funding from corporations, state-owned (30% of deposits at the end 3 square. 2012), a relatively small size in comparison with the resources of a sovereign issuer and potentially significant reputation damage to the country's authorities in the event of default of the bank. The difference in level between the two sovereign rating "BBB-" and IBA rating reflects the delay and the limited scale of the bank's recapitalization by the Azerbaijani authorities in the past two years, the fact that the government owns only 50.2% of the bank and the potential privatization of the IBA in the medium term.

Moody's rating is likely to have a similar change long-term IDR of IBA. Outlook on the IDRs is now "stable", reflecting the limited potential rating changes in the near future. -15D -