Iraq eyes first independent bond sale in a decade

Iraq eyes first independent bond sale in a decade

Oil rich but war-ravaged nation looks to tap investor demand for yield

YESTERDAY

Iraq is bidding to make its first independent return to the capital markets in more than a decade, canvassing investors’ interest in a five-year bond after successfully launching a US-backed $1bn fundraising earlier this year.

The oil-rich but war-ravaged Middle Eastern country has appointed three banks as bookrunners and will be meeting with prospective investors in the coming days.

In late 2015 Iraq called off plans to return to the bond markets for the first time since the official end of US occupation, citing the excessively high cost investors were demanding in order to buy into the issuance.

Its attempt to revive the plan last year was also abandoned, before it succeeded in raising $1bn of five-year bonds in January this year. That sale was guaranteed by the US and paid a coupon of 2.149 per cent.

The new bond is being offered to investors without a US guarantee, leaving them dependent on Iraq’s own credit quality.

The Republic of Iraq has a high-risk credit rating of B minus from both S&P and Fitch Ratings.

Fitch in March revised its outlook upwards from negative to stable, citing an improved fiscal position. The budget deficit narrowed to 8.1 per cent of gross domestic product in 2016, from 12.3 per cent the previous year, and the rating agency forecasts it will fall further to 5.1 per cent this year.

Baghdad agreed a $5.4bn IMF bailout programme last summer which, Fitch said, “has helped Iraq’s financing options”. The country has also received funding from the World Bank and bilateral project loans.

Iraq has $2.7bn of bonds outstanding that were sold in 2006, but has issued no new long-term debt in the past decade.

Its bid to return to the capital markets is the latest sign of a buoyant environment for sovereign debt issuers, coming two days after Greece raised €3bn in its first deal since 2014, and a month after Argentina issued debt with a 100-year maturity.

Iraq will hold a series of investor meetings in the coming days with a view to drum up appetite for the dollar-denominated, long-dated, benchmark-scale bond, and has mandated Citi, Deutsche Bank and JPMorgan as joint bookrunners on the deal.

Investors who buy into the bond will be taking on an uncertain political and economic situation. The country’s economy was badly hit by falling oil prices and regional observers fear the waning power of Isis could precipitate further instability.

Jan Dehn, head of research at emerging markets specialist Ashmore Group, said the prospect of an Iraq bond was appealing.

“There is a lot of bad noise of course because there are real problems but that has not impacted on Iraq’s ability to pay,” he said. “So you get a nice risk premium compared to other countries in the region. Iraq is in a bad neighbourhood but it has done a lot of adjustment to lower oil prices and we feel they are able to service their debts.

”Even without an explicit US guarantee, any new Iraqi debt issuance would be regarded by investors as having “the implicit backing” of the US, Mr Dehn said, given the geopolitical regional importance of the country “remaining in the US sphere of influence”.

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