Iraq plans to issue $5bn of five-year bonds

Iraq plans to issue $5bn of five-year bonds
Updated 23 March 2015

Iraq plans to issue $5bn of five-year bonds

Iraq plans to issue $5bn of five-year bonds

DUBAI/LONDON: Locked in a war against Islamic State militants, its finances ravaged by the plunge of oil prices, Iraq can nevertheless count on the promise of its oil reserves to attract buyers to its first international bond sale in nine years.
Finance Minister Hoshiyar Zebari told Reuters last week that the central government was discussing with Citibank and Deutsche Bank a possible issue of $5 billion of five-year, US dollar-denominated bonds to help cover its budget gap.
Many fund managers think Iraq will be unable to sell such a huge amount of bonds at one time, especially since it doesn't have a credit rating from a major agency — getting one could take months. Backing the bonds with specific oil revenues would boost investor demand, but the government has not said it will do this, and it may be reluctant to tie its hands in this way.
So a smaller issue may be conducted in coming weeks, perhaps between $1 billion and $2 billion.
Nevertheless, there is little doubt that Iraq can still access the international debt market when it wants. Its oil reserves are so large, and its plans to bring them into production are so ambitious, that it is an attractive credit for some funds willing to trade political risk for a high yield.
OPEC's second-biggest oil producer boosted its output to 3.40 million barrels a day in January from 3.05 million bpd a year earlier. Baghdad has said it aims to lift its overall capacity to 8.5-9 million bpd by 2020.
This target may be over-optimistic given security worries, poor infrastructure, and shortages of cash and water. But Iraq's giant oil fields are in the Shia-dominated south, which is relatively safe from Islamic State attacks.
Buyers of Iraq's bonds will bet that even if the expansion plans are not full implemented, production will increase enough in coming years for Iraq to service its debt comfortably.
"Iraqi oil production ambitions are high and provide a positive catalyst for Iraqi debt," said Bryan Carter, portfolio manager at Boston-based Acadian Asset Management.
"Among oil credits we favour those with room for adjustment. Some countries can adjust expenditures (Angola, Ecuador), while others like Iraq can expand production.
"In that sense, increased oil production is a positive sign when compared to countries like Nigeria or Bahrain, which rely heavily on oil income but are constrained on both fronts."
Secondary market trade in Iraq's outstanding US dollar bond maturing in 2028 suggests that after panic selling late last year as oil prices plunged, investor confidence in the country has partially returned.
The yield on the bond jumped to a record high of 10.49 percent in mid-December from around 7.2 percent in September, but has since dropped back to 8.54 percent.