Azerbaijan's biggest bank raised $900m via Irish SPVs before default
Deal involving Ireland risks damaging the country's reputation
When Azerbaijan's biggest bank wanted to raise hundreds of millions of dollars from funds in neighbouring 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 $22bn national pension fund in Kazakhstan is probing its investment in the debts.
It shines a light on Dublin's role as a hub for deals originating in the former Soviet Union through the use of thinly-regulated special-purpose vehicles (SPVs), that critics say can mask risk and avoid scrutiny. Several Russian lenders have used such entities to borrow funds before unravelling 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, the former Trinity academic who is now a professor at the Middlebury Institute of International Studies in California. "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 an SPV bond deal to ensure it makes disclosures mandated by law, a spokeswoman said by e-mail. The veracity of those disclosures is the responsibility of the SPV's directors, she said.
Ireland tailored 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. Irish firms reaped €224m in fees from the industry last year, according to the Central Bank.
But the IBA case shows the reputational damage caused by "high-risk cases'' involving losses for pensioners overseas, said Mr Gurdgiev.
IBA, controlled by the Azeri state, has borrowed about $900m since 2007 through Dublin-based SPVs Rubrika Finance Co. DAC and Emerald Capital DAC in deals arranged by JPMorgan and Citigroup, Bloomberg data and Irish company filings show. About $350m 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 EU exchange, the Central Bank of Ireland said.
The Azeri bank said on Friday that it agreed to changes in its restructuring plan for about $3.3bn 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 on June 19.
Kazakhstan's state-run pension fund, meanwhile, is staring at a loss on a $250m 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 82pc of its face value. A spokeswoman for the exchange in Dublin, declined to comment.
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.
"IBA was never regarded as a well-run bank that has a self-sustainable business model," said Lutz Roehmeyer, who helps oversee €12bn at Landesbank Berlin. "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 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 oversees the entity.
Spokesmen for Deutsche Bank and TMF declined to comment.
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.
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 of assets, more than double the country's gross domestic product, according to the central bank. 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 $1.2bn 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." (Bloomberg)