When the largest bank in Azerbaijan filed for bankruptcy this spring, Cargill once again experienced the pitfalls of lending in countries with shaky economies and opaque regulation.
Cargill is the International Bank of Azerbaijan’s largest creditor, owed $715 million.
The Minnetonka-based giant known best for food and agriculture also is in the trade finance business, and the Azerbaijani bank is the latest overseas bank to flop owing Cargill money. Three Ukrainian banks that collapsed in recent years together owed Cargill about $300 million at one time or another.
However, as with the Ukrainian banks, Cargill stands to get repaid in the reorganization of the International Bank of Azerbaijan. The $715 million the company is owed is expected to be converted to debt directly backed by the government of Azerbaijan.
“We haven’t taken any material reserves and we expect to be fully repaid through the reorganization plan,” Cargill said in a statement regarding the Azerbaijani bank.
While agribusiness is its bread and butter, Cargill — the largest privately held U.S. company — has long had a financial services arm. Its “trade and structured finance” group provides trade finance credit, including directly to banks, which then lend the money to firms involved in foreign trade and commodities.
The International Bank of Azerbaijan owed Cargill $715 million in what appears to be short- to medium-trade financing loans when in mid-May it filed a Chapter 15 proceeding in U.S. Bankruptcy Court for the Southern District of New York.
Under Chapter 15, the Azerbaijani bank is shielded from U.S. lawsuits while it reorganizes in its home country — and Cargill was threatening to sue, the bank said in a court filing.
When the troubled bank started reorganizing in Azerbaijan, it triggered a default on its Cargill debt and other credits. Cargill had “reiterated a willingness to accelerate the debt and/or bring legal action against [the International Bank of Azerbaijan] in the United States,” according to a bankruptcy court filing.
Cargill’s loans to the Azerbaijan bank comprise 22 percent of the $3.3 billion in debt that the institution is working to refinance.
The bank said last month that creditors holding over 90 percent of its debts have approved its reorganization plan. Cargill confirmed it favors the plan. The bank’s restructuring plan could receive court approval as early as Aug. 15.
The International Bank of Azerbaijan has seen trouble for the past few years, hurt among other things by the depressed price of oil, a pillar of Azerbaijan’s economy. With its loan portfolio decaying and the continued devaluation of the Azerbaijani currency — the manat — the bank lost more than $1 billion in 2016.
‘Internal control’ issues
The economy wasn’t its only problem. The bank, owner of a 39 percent share of Azerbaijan’s banking market, had “internal control weaknesses,” according to bankruptcy documents filed by the bank. Some of its customers “may not have been properly identified as related parties.”
Indeed, the entire Azerbaijani banking systems is “highly concentrated and underdeveloped, with weak governance and underwriting standards,” bankruptcy documents say. The International Bank of Azerbaijan’s CEO resigned in 2015 amid poor results and was later convicted of embezzlement.
As conditions worsened for the bank, the Azerbaijani government injected capital into it, increasing state ownership from about 50 percent in 2015 to 95 percent currently.
Cargill was one of nine providers of trade finance credit to the International Bank of Azerbaijan; the rest are banks, mostly based in Europe.
Structured trade finance is a niche market dominated by international banks and global trading companies like Cargill. Cargill, which had $2.8 billion in profits and more than $110 billion in sales during its most recent fiscal year, has been in the structured finance business since 1993.
“Cargill’s structured financings to banks are designed for such funds to be lent by the bank to named corporate customers of the bank who are active in commodity markets,” the company said in a statement. The credit terms for Cargill’s loans are usually one to three years.
Cargill said its “exposure” on structured finance loans is often “only a small percentage of the nominal amounts that are publicly profiled.” Trade finance lenders like Cargill can mitigate their risk by among other things, selling portions of the loans they make, or by using credit insurance.
Cargill declined to comment on details of the $715 million Azerbaijani bank credit, and declined to make an executive available for an interview.
Ukrainian bank failures
The International Bank of Azerbaijan’s tailspin comes on the heels of two bank failures in Ukraine over the past two years that also included Cargill credit. Ukrainian bank regulators have closed dozens of banks in recent years, institutions hobbled by the country’s shaky economy and in some cases, mismanagement.
In December, Ukraine’s largest bank, Privatbank, was taken over by the government, owing Cargill $70 million, according to Ukrainian press reports. Ukraine’s central bank accused Privatbank of lending too much money to entities connected with its shareholders and management.
In a statement, Cargill said its “trade-related loans [to Privatbank] are being repaid in full.”
In 2015, Delta Bank, which owed Cargill about $100 million, failed — the largest private bank insolvency in Ukraine at the time. Delta Bank became the target of a criminal fraud investigation in Ukraine, including for theft of government money.
Cargill, as a creditor, had no role in managing Delta, the company told the Star Tribune in 2016. Cargill exited Delta in a complicated transaction a month before the bank crashed. At the time, Cargill told the Star Tribune that it had generally worked out its exposure to troubled Ukrainian banks “so as not to lose our principal.”
Before Delta Bank died, Cargill had headaches with Nadra Bank in Ukraine, which was declared insolvent in 2015. Nadra initially ran into trouble after the 2008-2009 global economic collapse. At that time, one of the bank’s major concerns was restructuring its trade finance debt, which included $125 million owed to Cargill.
A deal was worked out, and Cargill appears to largely have gotten its money back from Nadra in 2010.