IF you hear of a bank default in a small country like this you have to look to see what other banks might default in that country or other countries too along the way. This isn't good.
When
Azerbaijan’s biggest bank wanted to raise hundreds of millions of
dollars from funds in neighboring Kazakhstan, it headed 2,700 miles in
the opposite …
Photographer: Chris Ratcliffe/Bloomberg
Azerbaijan Bank Took $900 Million Irish Detour On Way to Default
by
Donal Griffin
,
Jake Rudnitsky
, and
Nariman Gizitdinov
Deal latest involving ex-USSR firm and Irish SPV to go awry
When Azerbaijan’s biggest bank wanted to raise hundreds
of millions of dollars from funds in neighboring Kazakhstan, it headed
2,700 miles in the opposite direction to Ireland.
The International Bank of Azerbaijan,
or IBA, used obscure Dublin-based entities to sell bonds that were
bought by state-linked funds in Kazakhstan about three years ago. Now,
the Baku-based lender has defaulted and its long-time chief executive
officer is in jail for embezzlement, while a $22 billion national
pension fund across the Caspian Sea in Almaty is probing its investment
in the debts.
The debacle shines a light on Dublin’s role as a hub
for financing deals originating in the former Soviet Union through the
use of thinly regulated special purpose vehicles, known as SPVs, that
critics say can mask risk and avoid scrutiny. Several Russian lenders
have used such entities to borrow funds before unraveling amid claims of
mismanagement and, in some cases, corruption and embezzlement.
“Irish authorities should have exerted more scrutiny over the
IBA placement,’’ said Constantin Gurdgiev, a finance professor at the
Middlebury Institute of International Studies in Monterey, California,
who studies the Irish economy. “The Central Bank of Ireland needs to
learn some lessons from the IBA and other scandals involving Russian and
former USSR entities trading from Irish platforms.’’
The Central
Bank of Ireland checks the prospectus of a SPV bond deal to ensure it
makes disclosures mandated by law, spokeswoman Katie Philpott said by
e-mail. The veracity of those disclosures is the responsibility of the
SPV’s directors, she said.
Global Hub
Ireland tailored its
tax legislation to create a global hub for SPVs -- entities with no
employees that are used to borrow money on behalf of corporations around
the world. Firms are quickly able to set up SPV structures in the
country that deliver little or no taxable profit and often list the
debts on the Irish Stock Exchange. Local firms reaped 224 million euros
in fees from the industry last year, according to the nation’s central
bank.
The practice prompted Irish regulators in 2015 to increase
reporting requirements for SPVs, part of a global push to better
understand the risks that the structures pose for regulated banks. The
IBA case shows the reputational damage caused by “high-risk cases’’
involving losses for pensioners overseas, said Gurdgiev.
IBA,
controlled by the Azeri state, has borrowed about $900 million in total
since 2007 through Dublin-based SPVs Rubrika Finance Co. DAC and Emerald
Capital DAC in deals arranged by JPMorgan Chase & Co. and Citigroup Inc.,
Bloomberg data and Irish company filings show. About $350 million of
this was outstanding when the lender defaulted on a bond issued by one
of the SPVs last month, the data show.
JPMorgan and Citigroup declined to comment. One of the
Rubrika debts didn’t need regulatory approval as it wasn’t listed on an
exchange in the European Union, Bank of Ireland spokeswoman Philpott
said.
The Azeri bank said Friday it agreed to changes in its
restructuring plan for about $3.3 billion of debts after some of the
firm’s lenders attempted to block the proposed conditions of IBA’s
overhaul. It plans to disclose the revised terms June 19.
Kazakhstan’s
state-run pension fund, meanwhile, is staring at a loss on a $250
million IBA bond it purchased in late 2014, as oil prices slid, through a
private deal with Emerald Capital. Two parliamentary factions are
calling for those responsible for the investment decisions to be held to
account. The debt, which is listed on the Irish Stock Exchange, plunged
last month and is now worth about 82 percent of its face value. Ailish
Byrne, a spokeswoman for the exchange in Dublin, declined to comment.
Some investors were more fortunate.
In 2016, the Azeri lender repaid a $198 million Rubrika Finance debt
issued in 2013 to another arm of the Kazakh state, the Development Bank
of Kazakhstan, after that entity demanded early repayment.
A spokesman for the Azeri Finance Ministry did not respond to a request for comment on IBA’s use of Irish entities.
Adding
to the intrigue is Jahangir Hajiyev, who ran IBA for more than a decade
before he was sentenced to 15 years in prison for embezzlement and
abuse of office, with prosecutors linking him to unauthorized loans. Last month, during an unsuccessful appeal from a glass cage in a Baku courtroom, he criticized the bank’s restructuring plans.
“IBA
was never regarded as a well-run bank that has a self-sustainable
business model,” said Lutz Roehmeyer, who helps oversee 12 billion euros
($13 billion) at Landesbank Berlin Investment GmbH. “Foreign investors
just lent to IBA because it was quasi-sovereign.”
Roehmeyer’s
firm, based in Berlin, holds some of the bonds that IBA sold through the
Rubrika SPV, he said. His company also invested in debts issued by TFB
Finance Ltd., a Dublin-based SPV tied to Russian lender Tatfondbank PJSC that collapsed earlier this year amid fraud allegations, Bloomberg has reported.
JPMorgan helped IBA arrange the Rubrika deals, while Deutsche Bank AG
administers the SPV from its Dublin office, documents show. Citigroup
managed the Azeri bank’s trade through Emerald Capital, while a unit of TMF Group BV oversees the entity. Spokesmen for Deutsche Bank and TMF declined to comment.
To
be sure, other small nations vie for the same business. Rubrika and
Emerald are also known as financial vehicle corporations, or FVCs, a
form of SPV established to package loans and other assets into tradeable
securities. While Irish FVCs held about 424 billion euros of assets at
the end of March, more than any other country and close to a quarter for
the total euro area, Luxembourg and the Netherlands had about 507
billion euros combined, European Central Bank data show.
Still,
links between Irish SPVs and the former Soviet Union are strong.
Rubrika and Emerald are among about 1,800 of the entities in Ireland
that hold 739 billion euros of assets, more than double the country’s
gross domestic product, according to Philpott, the central bank
spokeswoman. Russia is one of the most common destinations for the funds
raised by SPVs, according to reports published by the regulator.
Several Russian lenders borrowed funds using Irish
SPVs before foundering since 2015, Bloomberg has reported. Regulators
seized Tatfondbank and Vneshprombank Ltd. and shuttered them amid charges of fraud and embezzlement. UralSib Bank Ltd. faced bankruptcy until the state orchestrated a takeover by an ally of President Vladimir Putin. Peresvet JSC, part-owned by the Russian Orthodox Church, will inflict losses on bondholders as part of a $1.2 billion rescue plan laid out in April.
“Little
or no action is being taken to understand the companies, the directors,
the fund-raising activities themselves nor the investors,’’ said Shaen
Corbet, a finance professor at Dublin City University. “The lack of
oversight within this system is generating an environment where
questionable, immoral, unethical and downright illegal funding channels
can flow undetected.’’
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