Iran has tapped international debt markets exactly twice in the past three decades. Those bonds, worth a total of €1 billion, have long since disappeared from traders’ screens, having matured almost a decade ago. But now, in the aftermath of Iran’s deal earlier this month with the six world powers to end sanctions, investors like Hans Humes are anticipating that drought to end soon.
As Iranian officials were in Vienna hammering out terms of the nuclear accord, Humes, a New York-based hedge fund manager, traveled to Tehran to do scouting work of his own. During a 10-day trip, he liked much of what he saw—a well-educated population, low homelessness, signs of a modernized economy—and said he’d be a buyer when the nation starts selling debt to finance projects that were not viable under the sanctions.
“The bond market appetite for everything Iranian will be pretty high,” Humes, founder of hedge fund Greylock Capital Management, told Bloomberg in a telephone interview from New York. He estimated it may take government officials a while before they’re ready, perhaps a year or so, “but they’re going to start tapping international markets.”
Before Iran can access overseas markets, the US and European Union will need to lift a complex web of sanctions, which mainly include a ban on its lenders from dealing with Iran and Iranian banks’ access to the leading global financial-messaging system known as Swift.
Debt Demand
They will remove these restrictions once the United Nations' atomic watchdog verifies that Iran has limited its nuclear activities. That verification is due by Dec. 15, though US officials estimate that it will take longer than that.
"With the US poised to start increasing interest rates later this year, a move that would erode demand for developing-nation debt, Iran will probably want to raise money as soon as possible to lock in borrowing costs below 10%," said Amir Zada, a managing director at Exotix Ltd., which specializes in illiquid and distressed emerging-market debt.
A request for comment from the central bank in Tehran about Iran’s debt issuance plans was not immediately returned on Sunday.
BP, Shell
Iran, which has the world’s fourth largest crude oil reserves, is seeking funds to upgrade economic sectors that suffered the most during the sanctions. To capitalize on foreign interest already expressed by Royal Dutch Shell Plc, BP Plc and Total SA, the Islamic Republic has to improve industrial infrastructure.
The bulk of Iran’s outstanding debt–about $6.5 billion—is from bilateral loans it received from Asian countries, according to Dina Ennab, an analyst at Capital Intelligence. The country also borrows domestically and has never defaulted on a commercial obligation, she said.
Zada, who used to trade Iranian debt while working in Exotix’s London office, said he expects be investor demand “from all over the world” when the country decides to sell bonds.
“Fiscally, Iran is very prudent and in good stead,” said Zada, the son of an Iranian immigrant. “They currently have no external debt. I’m sure once sanctions are lifted, there would be substantial demand for their hard currency debt.”
Debt, Inflation
Iran’s total government debt was just 11.4% of gross domestic product last year, according to estimates from the CIA’s World Factbook. That’s lower than 91% of the countries tracked by the CIA.
The economy, which is 15-20% smaller than it would have been without sanctions enacted after 2010, rebounded to post 3% growth in 2014 after two years of contraction. The central bank is aiming to reduce inflation to single digits and bolster the expansion once sanctions are lifted.
Renaissance Capital, a London-based investment bank, described Iran as the most important economy closed to institutional investors, and predicted interest will climb dramatically over the next year, according to a July 13 report.
Humes can attest to that.
During the trip, which he made with his 20-year-old son, Humes said he was impressed by everything from the country’s cultural activities–things like the Jame' Mosque of Isfahan and the tombs of Achaemenid kings at Naqsh-e Rostam–to the number of shops that accepted credit cards.
This reintroduction into the global economy, Humes said, "seems to be something they want to do for real."
