There's a new frontier in financial future flows. International Bank of Azerbaijan (IBA) sent out RFPs last week for a first-time deal collateralizing its diversified payment rights (DPRs), according to two sources with firsthand knowledge.

A transaction from IBA would introduce not only the bank but a whole new jurisdiction to the future-flow asset class.

With a long-term foreign currency rating of ‘Ba2' from Moody's Investors Service, IBA posted earnings of AZN183.2 million ($226.4 million) in the first half of 2008, from AZN115.1 million in 2007, according to the bank's Web site. Net profits, meanwhile, totaled AZN38.5 million in 1H08, from AZN22.1 million the year before. Assets totaled AZN3.6 billion by June 30.

Moody's domestic currency rating on the bank - often a good indicator of where a future-flow rating might end up - is ‘Baa2'. Fitch Ratings has an issuer default rating of ‘BB+' on the bank.

While the bank's centrality to the economy augurs well for systemic support and it's headquartered in a fast-growing economy, IBA is also highly dependent on large corporate clients operating in an undiversified economy. The fact that the bank is majority owned by Azerbaijan's Ministry of Finance opens it up to political maneuvering.

Rich in oil and natural gas, Azerbaijan has been coasting on jaw-dropping GDP growth of over 20% annualized during the past three years on the back of soaring energy prices. Moody's forecasts that growth will slow this year and next but will still remain above 10%.

As in Kazakhstan, DPR flows in Azerbaijan are likely disproportionately driven by export payments in the energy sector. It is unclear whether any banks other than IBA have sufficient DPR orders to support a transaction. The next largest bank in Azerbaijan after IBA, Bank Standard, sits on a volume of assets that is less than one-fourth that of IBA.

In a report last April on the three major states of the Caucasus region - Azerbaijan, along with Georgia and Armenia - Standard & Poor's said the region had a "long way to go in terms of economic development."

The agency cited geopolitical risk as a key constraint on the area's credit strength. Still, S&P doesn't rate Azerbaijan at this time.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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