OREANDA-NEWS. Fitch Ratings has assigned Russia-based IBA-Moscow Bank's (IBAM) RUB3bn issue of fixed-rate rouble-denominated bonds (series BO-01) a final Long-term rating of 'BB'. The issue benefits from recourse to IBAM's ultimate parent, International Bank of Azerbaijan (IBA, BB/Negative/b-).

The bonds have a tenor of three years with a put option in one year. The coupon for the first year has been set at 11.5%. The proceeds from the issue are being used solely for IBAM's corporate purposes. Should IBAM fail to make a coupon or principal payment under the terms of the bonds, bondholders will benefit from a public irrevocable offer (PIO) that would allow them to sell the bonds to IBA.

IBA's offer to purchase the bonds in case of a default by IBAM represents an irrevocable undertaking and ranks equally with IBA's other senior unsecured obligations, save those preferred under Azerbaijan law. Under Azerbaijan law, retail depositors rank ahead of other senior unsecured creditors. Retail deposits accounted for 16% of IBA's total liabilities at end-2015, according to the bank's unconsolidated statutory accounts.

KEY RATING DRIVERS
The issue's rating is equalised with IBA's Long-term foreign-currency Issuer Default Rating (IDR), reflecting Fitch's view that default risk on the bonds 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 of a moderate probability of support for the bank, if needed, from the Azerbaijan sovereign (BB+/Negative). This view factors in (i) IBA's high systemic importance, stemming from the bank's dominant market shares and substantial funding from state-owned entities; (ii) the bank's majority state ownership; (iii) IBA's moderate size relative to the sovereign's available resources; (iv) the potentially significant reputational damage for the authorities in case of IBA's default; and (v) the recently improved track record of support (for details see 'Fitch Affirms IBA and Pasha Bank; Downgrades AccessBank on Sovereign Action' dated 9 March 2016 on www.fitchratings.com).

The one notch differential between the sovereign's and IBA's ratings reflects (i) the still short track record of significant support for the bank after a more extended period when sufficient support was not forthcoming; (ii) moderate risk that, in case of extreme sovereign stress, the authorities would cease to provide full support to IBA and other quasi-sovereign entities ahead of a sovereign default; and (iii) the authorities' stated intention to ultimately privatise the bank.

RATING SENSITIVITIES
The bond's rating is likely to move in tandem with IBA's Long-term IDR, which is currently on Negative Outlook.